J Darrin Gross Podcasts

Commercial Real Estate Valuation Uncertainty with Rick Kalvoda – CRE PN #415

Rick Kalvoda 0:00

There’s a lot of questions is what is VAT? Where is value at this point, and you have what, you know, anytime there’s uncertainty and there’s a freeze up, there’s no transactions occurring, you have what we call it a bid ask spread. What someone’s willing to sell at their asking price is different, what someone is willing to buy it at the bid price. And so that spread means market value is not the asking price. It’s not the bid price, but it’s somewhere in between. And so that is a, especially when you get to office that is a widespread, everyone has the exact answer, they know exactly where the price is, it’s just no one agrees as to where that is, you know, if you’re an owner, you’re at the upper end of that range, if you’re a buyer wanting to buy you’re at the lower end of that range. And so from a value perspective is their their challenge. And it’s always a challenge in markets, when there’s no transactions, you know, it’s like going, you know, logging into your stock account and you want to sell a stock and there’s no buyers, well, what’s the value of that you really don’t know and or vice versa, if you want to, if you want to buy and there’s no sellers, is it’s figuring out where that is. And and it’s really using anecdotal information, it’s talking it’s a lot of communication, talking with brokers and investors and, and lenders and trying to get a feel and understanding all of that data and bringing that together and formulating an opinion of value. So a lot of discussions a lot of different opinions right now, probably the best way someone you know, or when a client you know, explain this is, you know, is where you know, you may not know where the value is, but you know where the value is not.

Announcer 1:44

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 2:03

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Rick Kalvoda. Rick is the President of the Analytics Branch for the Americas of Altus Group, which is a service provider of intelligence to the global commercial real estate industry. Rick has over 30 years of experience in commercial real estate consulting with a focus on valuation and management. And just a minute we’re going to speak with Rick about Data Insights into the Quickly Changing State of the Commercial Real Estate Market. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Rick Kalvoda. Welcome to CRE PN Radio.

Rick Kalvoda 3:54

Thanks, Darrin, good to be here.

J Darrin Gross 3:57

Rick, I’m looking forward to our conversation. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Rick Kalvoda 4:04

Sure, as you mentioned a little over 30 years in the commercial real estate business started out on the valuation side doing doing valuations. And we probably about 10 years into my career. We were acquired by PricewaterhouseCoopers. So that’s where I started more the advisory side of the bet so valuation advisory side of the business. And for the past 13 years I’ve been with Altus Group, as you said, leading global provider of not only advisory services, but then also data and software as well in the commercial real estate industry. So that’s been my 32 year career business.

J Darrin Gross 4:47

Got it. So as a an asset valuation specialist Are you agnostic to the class of asset or do you have a focus?

Rick Kalvoda 4:59

I’m primarily whatever, whatever our investors and so we work with some of the largest institutional investors across the globe. And so they will historically have primarily focused on the four major food groups. So think office industrial, multifamily, and retail. That has changed quite a bit over the past, let’s call it 10 15 years where there’s been other alternative asset classes that have come into or sectors that they’ve invested into. So think student housing and and single family rentals and self storage, medical office sucks address. So we pretty much work with any of those real estate sectors.

J Darrin Gross 5:46

Got it. So as far as the the valuations go, you mentioned last 15 years. We’re recording this in March of 2023. There’s been a little bit of turmoil in the marketplace in the last year with interest rates and not to mention COVID and etc without supply chain stuff. What are you seeing as the the most affected positively and negatively asset class for valuations.

Rick Kalvoda 6:25

So if you if you look at you mentioned COVID, and then now you know, with interest rates, if you think back to COVID, over the past three years, think not only multifamily, but then also industrial and more specifically industrial has been very positive, positively impacted as we went more to online shopping as opposed to you know, in in, in store shopping, is industrial has had just a phenomenal and then also think of the amount of money that has been put into the system think fiscal stimulus, think lower interest rates, quote, unquote, free money, much more spending that has occurred. And so warehouses by far been industrial warehouse has by far been the biggest beneficiary in terms of sectors over the past three years from COVID. Looking to today, now as part of the inflation and now the Fed now fighting inflation with the increasing interest rates and backing off and that liquidity, really all asset classes have been impacted. All sectors of in commercial real estate have been impacted. But from a fundamental perspective, most of the impact has flown or has gone to office and think of the work from home phenomenon. And and, yes, there’s been more of a back to Office focus in the US that’s been less successful. I think everybody will argue as to eventually where you know, how much of that work, work from home will stay and how much back to the office, there will be. But I think everyone will agree is it’s not going to be the same as what it was, you know, pre COVID. And so from a fundamental perspective, if you need less office than you needed, before the start of COVID, that’s going to have an impact. And especially now, as you have more stress in the market, more increasing interest rates, people are more focused on expenses, companies are more focused on expenses, they really look more closely at the need for the office space that they have, and really look at their return off as Paul policies on a go forward basis from a fundamental perspective, both from COVID but also now just the stress in the industry and in the economy is office has been most impacted.

J Darrin Gross 8:50

And no doubt. I’m curious, the clients that you you work with, you know, the commercial industry. The commercial real estate industry is kind of far and wide. Is it primarily the investor side or is it is it lender side? Or is it all all of the participants in the in the real estate market?

Rick Kalvoda 9:16

I a little bit of all but from the valuation, perspective valuation, especially the valuation you met mentioned the Bayerischer management focus that we have. That’s more on the investment manager side. So on behalf of the institutional investors, institutional investors will generally invest in a open ended fund or in a closed end fund, they’ll commingle that money into a fund where the manager of that fund the investment manager will go out and invest and buy and sell and operate the real estate. So we’ll work with those investment managers on the fund will work on helping them with that mark to market on a quarterly basis sometimes monthly sometimes even Daily, there’s no products out there now or even on a daily basis, they’ll need a mark to that to the underlying real estate. And so generally it’s we do work with investors, we do work with lenders, but primarily, it’s the investment managers of that commercial real estate.

J Darrin Gross 10:18

And within that mark to market requirements for the funds, have you seen a lot of, of willingness or letting go of some of the assets that are performing? Or is it more a matter of just recognizing that the the asset values have have lessened in the office type of acid?

Rick Kalvoda 10:41

Yeah, Dan, really, just because of debt is a very important part of commercial real estate. And so as that cost of the debt as interest rates have increased, is that’s going to impact the overall value of the commercial real estate of the assets. Generally, the institutional investors use less leverage, so they’re less directly impacted by it, but debt will impact just real estate asset prices overall. And so that that has an impact whether you’re buying for cash or buying, you know, we’re buying with leverage. So that that has an impact. As far as recognizing, you know, that is the big discussion right now, in terms of, you know, adjustments, you know, to those marks. There’s been a lot of that, let’s call it uncertainty, given that there’s no transactions because of the uncertainty. Where’s How far is the Fed gonna hike? Where’s inflation going to be? You know, three months, six months, a year? Where’s the fundamentals from office for office, not just now, but a year, three years from now, the lot of questions right now, just in the macro economic part of the market, but then also the commercial real estate market as well. is there’s a lot of questions is what is that where is value at this point, and you have what, you know, anytime there’s uncertainty and there’s a freeze up, there’s no transactions occurring, you have what we call it a bid ask spread, what someone’s willing to sell at their asking price is different, what someone is willing to buy it at the bid price. And so that spread means market value is not the asking price. It’s not the bid price, but it’s somewhere in between. And so that is a especially when you get to office that is a widespread, everyone has the exact answer, they know exactly where the price is, it’s just no one agrees as to where that is, you know, if you’re an owner, you’re at the upper end of that range. If you’re a buyer wanting to buy, you’re at the lower end of that range. And so from a valuer perspective is their their challenge. And it’s always a challenge in markets, when there’s no transactions, you know, it’s like going, you know, logging into your stock account, and you want to sell a stock, and there’s no buyers, well, what’s the value of that you really don’t know, and or vice versa, if you want to, if you want to buy and there’s no salaries, is it’s figuring out where that is. And, and it’s really using anecdotal information, it’s talking, it’s a lot of communication, talking with brokers, and investors and, and lenders and trying to get a feel and understanding all of that data, and bringing that together in formulating an opinion of value. So a lot of discussions, a lot of different opinions right now, probably the best way, someone, you know, or when a client, you know, explain this is, you know, is where, you know, you may not know where the value is, but you know where the value is not. And it’s not where it was yesterday, it’s not where you know, where the bid is where the ask is, it’s, it’s somewhere in between. And so you triangulate using all that data, and probably right now just talking about, specifically with Office data’s as you see some of the borrowers start, you know, had the properties back to the lender, is you now are stressing, well, now it helps establish where that value is doesn’t necessarily mean at that price at that, you know, where are they because sometimes it’s just used for negotiations and negotiating with the lender. But that’s what you might consider more of a distressed transaction, distressed sale, that doesn’t mean its market value, until you start seeing a lot more of that stress, which then becomes the market. And those are things that the third the appraiser needs to consider when they’re determining what that value is.

J Darrin Gross 14:28

Ya know, the, the, you know, just kind of the scenario you were talking about, there were some of the the investors are given, you know, properties back to the bank. You know, that’s kind of that that I don’t see a slippery slope, but it’s it, at least in the asset class of office. It seems like it could there could be a domino effect, but I’m assuming or they’re not. So I’m on the The bid side of the thing of the bid ask where there’s some, some opportunist investors waiting for something like that to happen to, you know, acquire properties like that.

Rick Kalvoda 15:14

Yeah, absolutely is is, you know if there’s a positive thing in the market right now is that there is a lot of capital out there that still wants to invest in commercial real estate, you know, there are people on the sideline looking and same thing happened after the GFC. Same thing happened, you know, back in the.com, is you had a lot of investors looking to take advantage of any drop in price to get in for the longer term, because commercial real estate is more of a long term investment. And so there is capital, they’re waiting, but given the uncertainty, given the risk, that they’re ascribing to the unknowns going forward, whether it’s on fundamentals, whether it’s on debt, whether it’s on pricing, whether it’s on the economy, is there waiting for a point, you know, you could say the same thing with stock market waiting for a point where it reaches a certain level before they will actually take the opportunity, opportunity to invest at that point. And so this positive, there’s capital there, the negative from a perspective of looking at this value perspective is, it’s not where the ask is now, it’s definitely something, you know, lower that. And another way we look at it is if you look at times where there’s no transactions, and there’s a bid ask spread, early in that cycle, is or in that time period, early is the market value is probably closer to the asset than it is to bed. But every day that goes by that things don’t change, and there’s still that bit s spread, the value that market values likely declining, you’re going closer and closer to where the debate is. So where we are right now, we’re probably, you know, nine months into, you know, where things started, you know, the Fed started raising, you know, second quarter of last year, we’re seeing where it’s, you know, we’re starting to see those, you know, declines, you know, accelerate, or, you know, seeing more and more of those adjustments to market value.

J Darrin Gross 17:11

Is there any data that you guys focus in on with respect to? How close one is to their, their rate term expiring? Or how, you know, how old their their dead is? On Does that, does that tend to be a, a, an action point, where where you see, you know, more, I don’t say desperate, but more activity occurs based on your, you’re nearing a point where you’ve got maybe an empty building, and you’ve got financing that’s expiring, and you’re gonna have to refinance, and you’ve got, you know, the situation becomes more dire, does that create any more of a need to act? Or is it? Was it none?

Rick Kalvoda 18:00

Yeah, no, that’s, that’s what we would call a compelling event is, or a critical event where, when you mentioned, it’s not just office, it’s really, you know, if you think about increasing interest rates, not only is that debt, so you may have a lower interest rate on that debt. And when it comes up for refinancing is now it’s at a higher lift. So not only will you be paying more for the debt service on that new loan, but then also, the value of that property like that underlying collateral know that asset is likely declined, that fundamentals are the NOI of that property to service, that debt has likely declined. And then on the flip side is, is there’s more uncertainty and your net, seeing the, you know, especially in, in office, we hear all the time, it’s inevitable, no, no lender wants to land on off, it’s just given the uncertainty of the values of the, you know, the debt sector, specifically. So you have all those factors that come together. So yeah, we do track information on properties across the US that where loans are coming due. That is a big focus this year with the amount of commercial real estate loans that, that that are maturing this year, and to your earlier suggestion is what happens, you know, as you know, if more of those properties are handed back to the lenders, or even just negotiate with lenders, what happens when that accelerates and if fundamentals don’t improve, if the economy does improve, if interest rates continue to go up further and values continue to climb further, all of that, you know, is is some of that risk and uncertainty that investors are looking at now and therefore, you know, from from a buyer’s perspective, demanding, you know, or they’re providing a lower bid before they actually, you know, invest in the market.

J Darrin Gross 19:59

So if we just exited a low interest rate environment, and most of the properties in the marketplace have lower debt on them, do you expect kind of a wave as this is the the older term start to expire that this will then increase and then that that will kind of like create that, that the valuation or mean will that kind of like, set the floor for, for, you know, the market and at that point, then the deals will, will start to happen, because the price has been set as a kind of the, the 123 of it or,

Rick Kalvoda 20:39

um, yeah, I mean, if you do see if it accelerates, and you see if the distress, whether it’s and and the keys back to the lender, the lender, then you know, they have real estate owned and reo. And then they, you know, they’re not, you know, in it for ownership, and so they’re looking to get it off the books, and so they then turn around and sell it, you know, in those distressed scenarios, if that becomes more the standard, if that becomes more reflects what’s happening in the market, because it’s happening that frequent, then that’s indicative of where market values, you know, shouldn’t be, you know, at that point, and one thing I’ll say with and specifically when we’re looking at office, and and you could correlate this to retail, especially regional malls 1015 years ago, is it really gets down to not just, you know, this sector, not just the market, not the, you know, the sector within that market. But really down to the individual property down to the individual assets, we used to say 10 years ago is what the regional malls Do you have the haves and the have nots, you had those that, you know, if you think of, you know, of a city or metropolitan area, and if you had five malls, it’s likely to go down to two miles or three miles. And so the haves those that will actually might benefit from closing of a couple of malls, and then those that just won’t make it, you know, in a bike malls and a three mile town, we’re starting to see the same thing with Office is as there’s less need for office space, think work from home, thank you know, if the economy slows or goes into a recession, there’s less need for that offices, which buildings will do very well, the top of the market, which ones will do, okay, in which ones it’ll be at the expense of the other, you know, the third, the third component there. And so you really have to look at those individual properties, what are the amenities? What are, you know, ESG is a big focus. Now, tenants won’t look at certain buildings, unless they’re, you know, certainly, you know, certification. And, and so it becomes much more focused, again, not just on the market, but now that particular you know, that particular asset, especially when it comes to, to Office, and so, so it isn’t just a hey, everything’s down, you know, X percent, did, you know, what is this building relative to other buildings in that in that market? Makes it much easier?

J Darrin Gross 23:10

So the average, what’s an average term? As far as debt financing for office? Is it seven to 10 years as far as rate law? More like five? by five? Yep. Okay. So theoretically, if, if we’re in year one have higher interest rates, within five years, this will, this will reset, is that

Rick Kalvoda 23:37

I? Well, you could say you’re seeing the reset now, because as those low interest loans, that that low interest debt over the past five years, you know, have been in the term can be longer than as well, but let’s call it five to seven years, is past five to seven years, as that’s now coming due. That’s when the reset occurs is when you adjust to that new level, because can can that property support that new level of debt service? And at the same time, I mentioned all the amenities needed in office, you know, that requires investment into, you know, into the building. So is there equity, and is there capital there from the owner? Is there willingness, you know, from the owner to invest that extra capital into the building, in order to support long term the debt service on that new loan. So, that’s really starting to happen right now. Then you started seeing, you know, some things, you know, from, from the lending perspective on offices, properties going back are being negotiated with the lender is happening over the past. Let’s call it the past three months, is that’s what you know, we’re watching very closely over the next, you know, six to 12 months, next two years as to what happens in terms of as those loans loans come due, then for the next five years as those are renegotiated or extended or have new loans at that higher level that actually helps helps the market longer term because now if it has no lending or it has a bone or if it was handed back and it was recapitalized with the with a lower level of loan against the property, then now that that helps that asset, it’s repriced, that helps the asset and the market on a go forward basis as well.

J Darrin Gross 25:24

Right, definitely the go forward, once you get through that stall, and the, the, the bid ask, and, and all the lending there. So if you were going to advise the listeners on what to do, or how to prepare for the next, or who as we go through this transition, what would your advice be? For you know, how to prepare and what to do to, to get through this?

Rick Kalvoda 25:52

Yeah, I would, I’d say, that mentioned, you know, earlier is just, you know, communication is very important. So it’s, you know, being, you know, with the lender, with the broker, with participants in the marketplace, is, as everyone’s trying to figure this out, is very important. And the second thing is, is and it’s gotten better, you know, over the past, you know, 2030 years, but is, is what the data is having the data and, and and you mentioned at the earlier, just data insights, you know, when an author says hope focuses on intelligence as a service, and so providing not only that, you know, the advice the, as a trusted adviser, not only having the software, you know, the technology behind it, but having that data and bringing that data together to make those informed decisions, whether it’s on an acquisition, whether it’s on a disposition, or whether it’s on an ongoing ownership, which you know, back to especially, you know, you think offices, which ones are the haves, which ones are the have nots based on the just voluminous amount of data that’s out there in the market, bringing that together to make an informed decision on on, on, on, you know, what your strategy is acquisition disposition, or, you know, ownership or, or, you know, improving in reinvesting in the property is, data is just so critical. You know, right now, anytime, it’s funny, just some of the data that and advisory services that we provide to our clients over the past 10 years, that wasn’t being used that much, because you just saw just a very consistent 1%, you know, every quarter was just you saw the tick up right up to COVID. And it was there wasn’t that need for that amount of data and the analytics behind that data. Now, as you see volatility, but probably more importantly, the uncertainty in the market. Now, it’s even more critical to have that, you know, information right now. So those are probably the two things, you know, it’s it’s communication, talking with people in the industry, but then also having the data, you know, to make informed decisions, those are probably the two biggest things.

J Darrin Gross 28:01

Hey Rick, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And then if that’s not an option, then we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests if they can look at their own situation, could be your clients, investors, tendons, the market interest rates, political however, however, you’d like to identify what you consider to be the biggest risk? And again, for clarification, while I’m I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Rick Kalvoda, what is the Biggest Risk?

Rick Kalvoda 29:04

Yeah, I think. So operating expenses of which, you know, insurance is is a big component, you know, the risk, I think, right now have ownership of commercial real estate. I think right now, and this kind of goes back to the uncertainty and what’s going to happen with inflation, what’s going to happen with interest rates, what’s the Fed going to do is just, it’s the uncertainty. And as the Fed continues with that increases, the biggest risk right now is is there, you know, is there a global financial crisis, you know, you starting to see the stress on some of the banks, you’re starting to see, as I mentioned, with some of the, you know, blending or the borrower’s, you know, handing keys back to the lenders, you’re starting to see some of that, at the same time, slowing economic growth, you know, and also increase inflation, all that stress to the economy that if we go into a recession if we continue to have higher interest rates and that that’s going to have an impact not just on commercial real estate, but across all asset classes, but then specifically, commercial real estate and especially with, you know, the amount of lending done by the regional banks, which you know, are, over the past couple of weeks have seen this stress is, that’s probably the biggest, you know, concern out there is in biggest risk for our investor and for our clients, is just what happens, you know, the overall macroeconomic picture and there’s just so many different things impact again, on top of that, you know, back to your comment just on insurance is just with the, you know, you just think of the climate risk and everything that’s, you know, happened this year, and, and how that impacts, you know, commercial real estate, whether it’s rising, you know, ocean levels, etc, is, all of that has, you know, so our clients, the owners and operators of that commercial real estate, not only have to think about that, but then the macroeconomic you know, side of it as well. So, so a lot of risks now, hence the uncertainty, but that’s, we’re all here to help the industry out, you know, in times of risks like that, ya

J Darrin Gross 31:12

know, plenty of risk to go around, that’s for sure. Hey, Rick, where can listeners go if they’d like to learn more connect with you?

Rick Kalvoda 31:21

i You can go to our website, altusgroup.com and reach out and we’re happy to help. You know, with any, any data software services needs they have in the commercial real estate business.

J Darrin Gross 31:36

Awesome. Well, Rick Kalvoda, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. I learned a lot, and I look forward to doing it again soon.

Rick Kalvoda 31:48

Absolutely. Anytime. Thanks, Darrin.

J Darrin Gross 31:50

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.

Announcer 32:08

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Better Asset Management Tools for CRE Investors with Anne Hollander – CRE PN #413

Anne Hollander 0:00

The number one thing that we advise is visibility more than anything else, it’s very difficult to manage the things that you can’t see, and you can’t manage overall. So really getting this visibility ideally in, you know, where you can have a real time daily, weekly, monthly look at what’s going on at your individual property is incredibly important. This visibility can come also from the income side of the house as well and to what your cash flow is looking like. So beginning to look at things that are happening below the line and making some strategic decisions about what makes sense in this kind of environment. For somebody who’s just starting into a value add project, the timing is not great, frankly, for what that looks like. And so potentially delaying that reducing the scope of what you’re trying to do and understanding what the financial impact is going to be incredibly important. But that holistic visibility to everything that’s going on, not just operationally but also with debt with equity and of course with risk incredibly, incredibly important for operators, owners investors, frankly everybody in the real estate space.

Announcer 1:13

J Darrin Gross 1:33

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment, catastrophic loss. The experts at building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more go to building insurance risk.com.

Today, my guest is Anne Hollander, and is the CEO of Lobby CRE, a Thirty Capital Company. And she is making an impression in CRE and tech as one of few CEOs with a background in both real estate operations and rapidly scaling technology companies. And as an expert in strategic strategic planning. And in just a minute, we’re going to speak with Anne Hollander about balancing return and risk with data backed asset management.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment we’d love to hear from our listeners. Also, if you want to stay on track to our guests are, be sure to check out our YouTube channel. You can find this at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest Anne Hollander, welcome to CRE PN Radio.

Anne Hollander 3:31

Thanks, Darrin, it’s great to be here with you today.

J Darrin Gross 3:34

I’m really looking forward to our conversation. Before we get started, if you could take just a minute and share with listeners a little bit about your background.

Anne Hollander 3:43

Absolutely. So I have been in this real estate space now for a little over 15 years and got my start first as a leasing agent and a small portfolio here in the Dallas Fort Worth area. From there I have worked with a number of real estate tech organizations I own and invest in real estate myself primarily focused here in the Dallas Fort Worth area and now serve as the CEO of Lobby CRE as well as the Chief Strategy Officer of our larger parent organization Thirty Capitol.

J Darrin Gross 4:17

Awesome. So the Lobby CRE. Can you tell us a little bit about what what’s the what is the focus of Lobby CRE and and what, what does it provide as far as service and words clients?

Anne Hollander 4:34

Absolutely. I think this may be a great introduction for your audience to Lobby CRE is we are relatively new inside of this market space. So Lobby CRE is an asset management platform that is designed to help manage and optimize noi cashflow valuations and ultimately the returns to the sponsor and investors. We’re focused primarily in the asset management space We believe that the asset manager in real estate organizations, is the unsung hero to link together both the operational efficiencies, as well as the financial strategy of what a real estate asset and investment look like. So very excited to provide new capabilities to the asset management side of the house. So historically, they’ve been largely ignored, and, you know, left to their own devices and their own technologies, workflows and processes to go figure out, what do I need to do to maximize the returns that come back out of this investment?

J Darrin Gross 5:34

Ya know, I, I, I’ve come to recognize myself. The distinction I think a lot of times the depending on how company operates or investor operates. A lot of times the the operations management in the asset management or may be lumped together, and they’re truly two separate operations.

Anne Hollander 5:58

They absolutely are. We see property managers in particular, very focused in finding the operational efficiencies, you frankly, you want those people to be in front of the other folks within the building that they serve, whether that means office tenants, retail tenants, you know, industrial tenants tends to be a little more centralized, but see this most often in the multifamily space, versus an asset manager who needs to be thinking about how do I return back what I need to to the investors, not whether there’s a broken pool pump, or, you know, the common areas need to be cleaned up, or I needed a maintenance crew on site?

J Darrin Gross 6:34

Right, right. Right, no, very, very kind of Micro Focus on the return kind of thing. And then and then push down to operations and make sure that happens. So let’s talk about, you know, the current situation, markets, you know, changing, we’ve got interest rates, increasing, we’ve got kind of, I don’t know what to call it, and just kind of there’s, I’ve heard a lot of people refer to it as pencils down, just kind of like trying to figure out where things are, and, and what, and it would seem to me that, in this environment, the focus on your net operating income, and making sure you’re not going backwards, but how to maintain and or, or push your noi upwards would be critical for any, any real estate investor to be successful. How, how is it that Lobby CRE and an asset managers can reduce the risk and then push the net operating income up?

Anne Hollander 7:49

So I think that’s the question on everybody’s mind right now. So thank you for asking that. Certainly, in every conversation that I have, with our clients, with my colleagues in this space, that is the number one question at the moment. The good news is that, yes, it’s pencils down. And I know for folks that are focused, you know, as a transactional broker or focus in acquisitions, this can be a tough time for you, because you’re kind of twiddling your thumbs, you’re looking at opportunities, you’re looking at things trying to get them to pencil. The good news in this is the pencil is not broken, necessarily. And so we see this volatility right now as just an opportunity to reset or recalibrate what our expectations look like. So as part of this, you know, when we talk about in particular driving in a why, really, this is all about increasing income and reducing your expenses. So, the big news here is that the income side of this has cooled off quite a bit in a number of markets. Now, I’ll be, you know, honest here, some markets have cooled off more than others, other markets are still pushing. And so understanding the dynamics of your specific market or sub market is incredibly important to figuring out okay, is this deal going to work? Or is it going to pencil or is it going to return what I need it to return? To stay ahead? The other part of this is reducing expenses, which I don’t think any of us are strangers to the supply chain disruptions that have affected us over the last several years. We’re not strangers to the to the natural events that have happened, particularly in Texas and in Florida with hurricanes energy issues, the number of insurance claims that have been processed in the areas that have been hit harder by more natural disasters and natural events going on. I can speak here in Dallas, our insurance costs going up quite a bit year over year as have property taxes. When we have tornadoes ripped through a major metropolitan area when we have wind storms with 80 mile an hour winds and above. It’s pretty easy to see you know exactly what it is driving these insurance premium. seems to go up in particular. But insurance isn’t the only piece of this either. Expenses across the board are up. And again Market to Market. We can say trend wise, up, but within each market anywhere from 8% increase to 20 25%. increase year over year.

J Darrin Gross 10:20

Yeah, no, I know, just as the insurance part of the thing that bet a lot of not happy to hear from me, clients, when I talk to him about the insurance rate increases, but it’s kind of all over the place. So, are there any specific I mean, we talked about insurance and inflation. I mean, it’s, it’s, I think that’s kind of just an accepted thing. You go to the grocery store, you go to the gas station, you go out to eat, I mean, my God, just the everything seems to have increased in price. Are there any specific points that you are focused on? Or that you see that operators can focus on to try and contain their cost? Or is it more about, you know, property to property market to market? Or are each individual situation is is unique?

Anne Hollander 11:14

Yeah, great question there. So the number one thing that we advise is visibility, more than anything else, it’s very difficult to manage the things that you can’t see, and you can’t manage, overall. So really getting this visibility ideally, in, you know, where you can have a real time, daily, weekly, monthly look at what’s going on at your individual property is incredibly important. This visibility can come also from the income side of the house as well, and to what your cash flow is looking like. So beginning to look at things that are happening below the line and making some strategic decisions about what makes sense in this kind of environment. For somebody who’s just starting into a value add project, the timing is not great, frankly, for what that looks like. And so potentially delaying that reducing the scope of what you’re trying to do, and understanding what the financial impact is going to be incredibly important. But that holistic visibility to everything that’s going on, not just operationally, but also with debt with equity. And of course, with risk, incredibly, incredibly important for operators, owners, investors, frankly, everybody in the real estate space.

J Darrin Gross 12:31

Yeah. So in the in the broader sense, not just on the property specific, but more like in the economy, or their space specific points that you look to or that you feel like investors and operators should focus on.

Anne Hollander 12:51

Sure. So at Thirty Capital, we’re focused on a number of different aspects of performance. So the operational component we focus on and have a deep level of experience inside of the capital markets. So really working with owners, in particular, and borrowers on debt and advising quite a bit on the right situations in which it’s right to take on that kind of debt. We also advise on the equity San front, and we ourselves have been a principal for quite some time in the real estate space, more than 20 years, at this point, investing in our own real estate assets. So as we as we look at this, right, we’re bringing our own experiences to this, we’re bringing our own background inside of managing real estate and of course, squeezing out those returns, not just in the what I’ll call the height of the cycle, or the growth side of the cycle where we’re able to leverage a little bit more on appreciation, but also in the the battening down the hatches side of the cycle where we find ourselves today. You know, debt is a big unknown at the moment, certainly, we’re seeing a ton of volatility, we’re taking a look on a daily basis it with our forward curves look like and beginning to make some decisions in our own real estate assets, as well as future opportunities based on what these forward curves look like. We’ve created our own proprietary model on this, which is, which has been not only a valuable project for us to take on, but something that’s been incredibly valuable for our clients that we serve across 30 capital within 30, capital financial. So really, you know, when I look at what the recommendation is, you know, taking a look at the economic indicators, in particular, around debt around inflation, and of course, the demographic shifts that are happening as part of that incredibly important to get a pulse on on a regular basis.

J Darrin Gross 14:50

No, that’s having some sort of a sense of a handle on it as mean, seems like kind of a slippery handler now, but Are there any, like more important? As far as the performance of a property? Or is there are there any, you know, indicators or metrics that you focus on more than others? Or is it? I mean, can you can you isolate me we’ve talked about expenses and income battening down the hatches, but is debt really kind of the focus point right now for most people or is it?

Anne Hollander 15:33

It certainly is a is one of those areas where it’s not particularly well understood at from the bigger scheme of, of commercial real estate, and one of those opportunities where you can get yourself in over your head, particularly depending on the asset types. So we’re beginning to see defaults. For example, in the office space, we have a quite a bit of office space, that due to the work from home trends, and some of the demographic shifts that we have seen, begin to take its toll specifically within Office. As part of this, we anticipate loan workouts and modifications to come through this, if not outright, you know, defaults on the mortgage itself. So having that debt background, having that advisor by your side, particularly important in these times, for folks that are looking to do a deal today, making the decision about whether a fixed rate loan or floating rate loan makes sense based on the equity position that you have, is an incredibly important decision, do you want to take on that risk and those costs up front in order to maximize your equity on the backside? Or did you want to put that off a bit taking a little less risk with a fixed rate loan, believe it or not, even with the volatility in the interest rate space, we still see people who are engaging in floating rate loans and taking those on for their new deals. And again, depending on the strategy and structure of how you’re structuring this deal, and what you’re looking to return back out of it, that could be the smarter choice to go and do. Certainly, one of the topics that doesn’t get a lot of attention today, but I think is going to everybody’s going to get a crash course pretty quickly here are the unfunded cap liabilities, so exceeding the the caps, or the limits that you may have set on your floating rate debt, those liabilities, beginning to to show up in the space, and causing quite a bit of, of economic and financial distress for a number of owners and investors in particular. So I think, you know, as I as I take a look at this, really that that holistic view of being able to put together what’s going on operationally at the asset, with the debt metrics and economic metrics, taking a look at forward curves, with the equity position and returns that you’re looking to achieve and trying to find the balance within those in this time. While not easy, incredibly important, for our for our asset managers to begin to go and look at this is why lobby care exists is to bring those three things into balance with each other in order to maximize what those returns look like.

J Darrin Gross 18:12

Yeah, you mentioned the capital requirements, and that wonder if you could give kind of an example of what you’re seeing or what you expect to see, as far as how that plays out.

Anne Hollander 18:26

I think it’s completely deal dependent, and then strategy dependent within that. So there are a number of different ways that this could potentially play out, depending on the asset type, depending on the asset class, depending on the market and sub market, depending on the demographics, for the asset itself. And then of course, you know, the the underlying factors within this as well, as we see office spaces begin to move into distress and defaults. And folks not moving into offices, or we’re going to work inside of offices like they did tenants beginning to move out or reduce the size and scope of the space that they have. This is not an isolated thing, this begins to put stress on the financial system or the the banks and lenders who have loaned out that particular money, right, and we begin to see this chain reaction happening with the additional stress that lenders and banks have, then as part of this, that the next step begins to happen where they tighten up their lines of credit, which then begins to affect a number of other industries in addition to commercial real estate. So you know, I don’t think that we can look at commercial real estate as the as a single isolated thing. This is instead one of the dominoes that has quite a bit of chain reaction that comes back out of that. The same can be said for multifamily as well. This has been the darling of the commercial real estate space over the last market cycle. And just last week, I was talking with colleagues of mine on a panel during an event that we we were at and asked the question, you know is multifamily Only still the smart bet, or is it the default bet at this point? And, you know, the panelists in taking on that question, you know, basically said it’s probably still both. But you know, we’re really, really, really looking hard at the multifamily deals right now, to make sure that this is going to return what we need it to return. Multifamily dwellers need that additional retail, and office presence in and around them, we’ve seen that they don’t want to commute the way that they used to, and they don’t want to have to go more than about a 1015 minute drive, in particular, to the next thing that they need to go and do, whether that be work, whether that be retail, whether that be entertainment, whatever that is, if things begin to shut down in those particular spaces, new development is not happening, redevelopment is not happening, then an impact multifamily becomes particularly difficult to, to get to a place where you can return what you’re looking for out of that property.

J Darrin Gross 21:03

It is kind of crazy when you look at the interrelation between all of the different asset classes, and and also the lenders in the the real estate market. And, you know, like you said, just the the domino effect. I mean, I think a lot of people, you know, focus on what they’re doing, and what they’re trying to accomplish, but may not understand the relationship between all of the different players and how it all plays out. And it is scary, I think sometimes when you look at how interrelated it is, and how, you know, if one is, is weak, how it can, you know, set up a collapse for not only that one, you know, aspect or asset class or property or whatever, but how it can have a effect paying it back to the banks. And and, you know, even though the market trend kind of thing. It’s that’s it is it is interesting, it is interesting. So, as far as trying to push the performance for for a portfolio, what what are some of the opportunities or the performance levers? Or what do you see that the the asset managers have available to them in order to push the the performance of a portfolio? Sure.

Anne Hollander 22:36

So today most asset managers that I talked to are trying to centralize or consolidate as much data as they can from as many different sources as they can. And one of the friction points of this is that that’s entirely manual today, I don’t think anybody here is a stranger to Microsoft Excel. But essentially, we are running our businesses and putting all of our trust into a tool that was designed to not to necessarily bring together that much amount of data and do that analysis, but has no background whatsoever in what do we need to be looking at within real estate space, creating the models that you need to see re forecasting out what a performer can potentially look like, in this particular dynamic, all very, very important from a tool perspective. And what we see are asset managers who for no fault of their own, are leveraging models that were created 1015 years ago, wouldn’t know necessarily if a particular formula was broken in that Excel spreadsheet, don’t know where that model is being distributed to or who has access to it, which may have some sensitive information in it, particularly if you’re including your cap table in it, as well as the you know, the fact that the data that’s coming in is in no way streamlined. You know, one data source may define occupancy in one way or another data source may define occupancy and another, which sounds completely insane until you begin to look to say okay, well, they defined occupancy, it’s physical occupancy, not economic occupancy, I need economic occupancy. Well, this other data source doesn’t have economic occupancy, they only have physical occupancy. So can I can I really even use these as a basis of comparison, let alone actually trying to bring in all this data. We have a timeliness issue of data as well. In many cases, data is being reported back, you know, 45 days, 60 days out for operational perspective. And in benchmark data, oftentimes, typically a year can go by before you have fresh data to go and actually look at. So there are some risks that go into this as you’re beginning to try to evaluate what your portfolio performance is today as well as what it could be in the future. Lavi care in particular solves a lot of this because we handle a lot of that data data centralization, bringing together the pro forma as well as modeling tools that come with this beginning to centralize the operational data from the property management systems and the tools that are being used at the property level, seeing all of your debt information, bringing in forward curve data in order to help model out and optimize what debt looks like. And then of course, with equity of being able to manage all of your investors that maybe as part of this, and using those tools all together to help model out what am I what do I need to do to get to the cash flow that I need to see particularly important in this day and age, as well as the returns that need to come back out to my investors. Investors, at the end of the day are the types of human beings who want to understand when and how much return they’re going to receive. The wind being a big part of this, and the how much being particularly important as well, we may have gone into deals that aren’t going to be able to return what we had initially expected. So communicating back out, and having confidence in what you’re communicating back out, particularly important in this dynamic.

J Darrin Gross 26:09

Yeah, no doubt. So let me ask you a lobby care is the data. are the data points? Are they can you customize which data points you’re choosing from? Or is that something that’s pre selected by lobby care?

Anne Hollander 26:23

Yeah, so we feature more than 500 metrics directly within the system itself. So you can choose what you want to look at. And I know that you asked me the question earlier around, you know, what specific data points do we need to be looking at, I think that’s highly dependent on the strategy of the asset itself, a lease up is going to operate differently than something that’s stabilized something in a core is going to be different than new development that you you may be working on or building value add is going to have a different strategy. And you may be looking at different metrics as part of this to help assess operationally, how effective Am I at driving the NOI and cash that I need. And then of course, how efficient ally in doing this. There’s a number of opportunities, where efficiencies, particularly within the commercial real estate space, and I think that we’re going to be over the next, you know, three to five years very, very focused on driving those efficiencies inside of our organizations.

J Darrin Gross 27:23

Yeah, I think that’s, that’s, you know, three to five years is, like, that’s kind of pretty accurate, I think. Let me ask you, so the, the 500 data points and the fact that everybody can kind of focus in on what their, what their, you know, what’s important to their situation? You mentioned some of the stuff or some of the data that’s available is, you know, almost a year old or, or, you know, how you may not be as current in not not just what you have, but just just the way the market and the data works out there. Is there anything that’s like, specific to the on the street? For the the market you’re in? Or how, you know, meaning that like, you know, you talked about how different, you know, different markets in different areas. And, you know, there’s some some markets that have have totally fallen off as far as income gains, whereas some are still able to hold is how customizable is the thing for just your specific area? I mean, or does it pick up data from from right where you are,

Anne Hollander 28:36

ya, so we’ll pick up data from right where you are. And with some additional tools that we have connected with lobby care, the ability to do, what we call peer to peer comps, or comparables in the space becomes very easy, no more of a manual process anymore. Instead, you can set those up directly within the system, and then have them run so that you can see every quarter, let’s say exactly how you’re doing against the cops in your market. This is going to provide you a level of detail that a lot of organizations don’t necessarily have today, or where they do have it prohibitively expensive to go and do. So we’re also not having to rely then on a property manager to pick up the phone and try to secret shop, who the comps are of what’s going on. We know that property managers all know one another, we know that they’re going to report back whatever it is that they want to report back. So keeping an eye on this and removing that from their plate, so that they can go and focus on all of the other things that we need to do operationally to be as efficient as possible, incredibly important to driving those ultimate efficiencies for the organization.

J Darrin Gross 29:45

So how is it how are you able to how Islami see Are you able to get that information without having the secret shopper? Property Manager do that? Sure.

Anne Hollander 29:57

So we one connect directly into the Property Management Systems, where we’re our clients, you know, are handling a lot of their their day to day data. So we’re seeing that day to day about the asset for data, specifically, what I call around the asset, where we’re starting to get into demographics and other things. This is a mix of data that’s coming from everything from lindo reporting to, on the CMBS side, to demographic data that’s coming in through census to get a more localized data sources where we can find it through other technology organizations who are opening up their data flows. So that lobbies care can can use them. And so that might be care clients can utilize that

J Darrin Gross 30:42

pool. And so is that part of the the agreement then for the users is that the data will be shared or that there is a reporting point? Not necessarily identifying their data, but some sort of a market data or how’s that work?

Anne Hollander 31:00

Yeah, so great question. And this is certainly one of my areas where I’d like to climb up on the soapbox. Historically, in the commercial real estate space, technology providers have taken ownership over the data that flows through their systems or their tools. So where a property manager or an asset manager and owner and investor etc. Use technology today, with the technology vendor that they’re using, oftentimes is claiming ownership of the particular data so that they can go and do anything else with it. Here at lobby care, we give that right back to whoever it is that’s using the system. And so they can decide directly do I want to share this in an anonymized fashion to create this market level reporting, there are benefits in doing so, of course, we have a product, the income and expense benchmark that where we have partnered with the National Apartment Association, the building owners, managers Association, the Institute of real estate management and among other organizations, to provide a benchmark a market side benchmark that has the ability to filter down quite a bit where if you’re contributing data to this benchmark, you receive that benchmark for free. That said, Your data may be more important to you than that benchmark itself, and you have full rights and access to turn off that data flow, we see this instead as an opt in to this program, rather than an opt out.

J Darrin Gross 32:29

No, I would think that, you know, just the overall the sense of that it’s not lobby CRDs data, but it’s a shared data type thing amongst the, the subscribers would be a welcome thing, as opposed to That’s mine, you gotta pay for it.

Anne Hollander 32:45

That’s fine, you get to work, I’m going to create other products that leverage all of your data that I’m then going to charge you for again, and, again, great,

J Darrin Gross 32:54

thank you, thank you for subscribing. And thank you for giving me all your data, and I’m gonna sell it to you and sell it to ya. Yeah, that’s, that’s good. So, you know, historically, I would think that, you know, more of your institutional firms would be more attuned to this kind of a data platform. Is it is it available to small and midsize operators,

Anne Hollander 33:20

we focus almost exclusively on smaller mid mid market operators, in particular. So with this, right, these are institutional grade capabilities to your point, but making them much easier to use and much more available to the mid market space is really where we’re focused. I don’t see us necessarily stretching up into the institutional space from the lobby care perspective, there’s no shortage of opportunity here in the mid market to provide these kinds of capabilities at a very effective price point to do so.

J Darrin Gross 33:54

And is there a sweet spot? Is it I mean, say the mid is that typically the client and how would you define the the mid market operator as far as a sweet spot of customer for lobbyists era.

Anne Hollander 34:09

So generally speaking, less than five or 6 billion in AUM, the mid market space, we have some clients that start that start fresh, they’ve been in the real estate space a while they were able to hit the height of the market, sell everything off and are beginning to build back. And they want to take on that first asset with the workflows and technology in place where they know that they can derive the most amount of efficiency out of that particular investment. And so they’ll start with just one asset on the platform as they begin to grow their portfolio. I’d say our sweet spot overall, typically, between 10 and 50 assets, we do have the capability to stretch much higher than that and we do have some larger clients than what that is. But certainly, you know, when you get to a place where you’re trying to manage more multiple assets at the same time, and see ever thing altogether, this provides you, uh, not only the opportunity to maximize the cash flow that you have to help fuel your growth, but also find the efficiencies that you need. It’s really just, you know, throwing gasoline on the fire when you’re thinking about the growth of your portfolio.

J Darrin Gross 35:16

Right. And I think a lot of times when I think of like, going to different data, or not data, but platforms, digital platforms for, you know, investors, property owners to use, I tend to think more of like the property management type software based on, you know, it’s, you know, it’s the operations kind of thing. But this is entirely different, more like a, you know, a step back and a larger kind of review of things and how to then affect the operations. If I’m understanding, right,

Anne Hollander 35:52

that’s right. So being able to optimize across the the asset, the debt and the equity positions together, rather than individual are isolated from each other.

J Darrin Gross 36:05

And if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically look to, we first look to see if there’s a way we can avoid the risk, that’s not an option, then we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is, it’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be your clients, your investors, the market? Your firm, how are we how are you’d like to frame the question. But if you can take a look at whatever that is, you want to identify and identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I am not necessarily looking for insurance related answer. And so if you’re willing, I’d like to ask you Anne Hollander, what is the Biggest Risk?

Anne Hollander 37:21

I am happy to take on this challenge. So over the course of our conversation, I think we’ve talked about a number of areas of risk, right, we’re seeing expense growth, quite a bit in the operations, which, frankly, is a lot of ways the silent killer. We’ve talked to them about the debt side of this and understanding your positions within debt and understanding it a much deeper level where you sit today and what risk you’re taking on within the debt that you have either existing today on the on your existing assets, or in the future as you’re doing deals. Frankly, you know, when I begin to look at, I think there’s also equity risk as well for capital call unexpected capital calls, if the to an asset and debt aren’t mitigated particularly well. So opening up new risks potentially on the equity side, and either not being able to return as much as you’re expecting, or potentially even being underwater in what those returns look like. The three of these things, though, can all be also, the other uncovered risk, or perhaps the area that we haven’t talked about at this point is the fact that a lot of information is being sent around quite a bit very freely and openly within an organization and, and then outside of the walls of the organization that can be highly sensitive or are particularly damaging to organizations. If you think about, okay, when was the last time that I took a look at my models that I had that had all of my investor information in it. And it’s all sitting in Excel, Excel can’t be secured. We don’t necessarily know where it goes, who it’s shared with. We don’t know how they access things. We don’t know if they if somebody is modifying something within that document, sending it back sending it around. And so Excel becomes essentially a game of telephone where everybody’s got their hands on it, and hands in it. For the most part, you know, fairly innocuous but not not in a place where we can necessarily even assess what if anything has changed or information has been borrowed or stolen back out of that document as well. I think the one thing that we don’t talk about much in the commercial real estate space is the technology risk and the data risks that people run when they’re using you know, tools that seem extremely convenient, but then have a complete lack of any level of accountability to them. Excel being probably the number one offender other potential tools also offender as well.

J Darrin Gross 39:55

Ya know that transfer of information and in that no sharing of documents? Well, that’s yeah, that’s a big, big problem especially like, if everybody has the ability to edit the document that’s you’re setting yourself up

Anne Hollander 40:12

Or find ways to edit it, right? I’ve been sent locked documents before that I can log into edit it, or save a copy of it, edit it, and then send that copy back out with the same, same thing. And I could do that in less than 10 minutes.

J Darrin Gross 40:25

Yeah, no, that’s, that’s, that’s always the it, you know, even in that instance, there’s no harm meant, but just the fact how that can change the whole, you know, model or, or whatever the expected outcome is, that’s, that’s in how it could affect somebody’s decision to act or do something that’s, that’s pretty scary.

Anne Hollander 40:46

I can strip investor information, such as bank accounts, social security numbers, ein, et cetera, out of these these documents that are being sent around, it’s, it’s truly amazing to me, how willing we are to share all of this data with other folks, but then don’t or get surprised, perhaps when something doesn’t quite come back the same way that we thought it was going to.

J Darrin Gross 41:10

Yeah. No, it is a scary time, and just, you know, the how, how fluid the information is, and how sensitive it is, and, and how much trouble it can create. It’s, it’s, it is a problem. And I don’t know how you get back. I mean, you go through all the dual wellthen authentication kind of situations. And I mean, it just seems like it’s very cumbersome and stuff and and then that’s what we need, if you’re going to try and be secure or some sort of a platform. That’s a secure way you got to log in. And that information is held on the platform. There we go. So that’s that. I assume that’s kind of what you guys have available on yours.

Anne Hollander 41:53

We do. Yes, yeah, we’ve got full access control, limits and permissions on what data can be accessed. And then of course, the full logs of who’s doing what within the platform.

J Darrin Gross 42:03

There you go. Got the logs. That’s the who’s who did this. That’s great. And where can listeners go? If they would like to learn more connect with you?

Anne Hollander 42:15

Absolutely. So I would point your listeners to LobbyCRE.com to get an understanding of how lobby care can help your organization. Certainly, I’m active on LinkedIn. So find me there. I’m just linkedin.in/in/AnneHollander, so you’ll find me there as well as Twitter. I’ve gotten back on the Twitter bandwagon as of a few weeks ago.

J Darrin Gross 42:41

So they’re all safe on the Twitter there. So there you go. That’s good. So well, Anne Hollander, I can’t say thanks enough for taking time or taking the time to talk today. I’ve enjoyed it, learned a lot, and I look forward to doing it again soon.

Anne Hollander 42:58

Thank you, Darrin.

J Darrin Gross 43:00

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.

Announcer 43:18

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Real Estate Investor Bookkeeping with Maya Weinreb – CRE PN #412

Maya Weinreb 0:00

And then real estate investors are funny, they’ll have one LLC that owns two properties and then one LLC that has these business or these partners and this LLC that have these business partners. So you really need to be able to track all of those things separately, and you need to be able to run a p&l by property, you need to be able to run a p&l by LLC you know, I needed to know all these things and you need to be able to look at it whenever you need it whenever you’re looking at okay, do we have enough profit to buy another property or you’re trying to get another you know, an investor or maybe another mortgage or whatever it is you’re trying to do? You have to have those papers at the tips of your fingers.

Announcer 0:43

J Darrin Gross 1:03

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to BuildingInsuranceRisk.com.

Today, my guest is Maya Weinreb Maya is an entrepreneur and a real estate investment bookkeeping specialist. Maya’s been doing bookkeeping for almost 20 years, and is a QuickBooks Pro advisor. Before she started her bookkeeping firm, she held the position of CFO for a marketing company in Los Angeles. And in just a minute, we’re going to speak with Maya about what does every real estate investor need for their books.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how attractive Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Maya Weinreb. Welcome to CRE PN Radio.

Maya Weinreb 3:04

Hi, thank you so much for having me.

J Darrin Gross 3:07

Well, I’m so glad you’ve joined us. And I’m looking forward to our talk. Before we get started, if you could take just a minute and share with listeners a little bit more about your background.

Maya Weinreb 3:19

Yeah, so I mean, you you kind of said it. You know, I’ve been doing bookkeeping, almost 20 years I had in house, bookkeeping positions straight out of high school. And I was CFO for a marketing company. And then I decided to start my own company I had I started freelancing. So I had bookkeeping clients that I was doing, you know, on the side, and in 2018, I decided to go off on my own. Which speaking of risks, that was a fun risk. But I did that. And you know, it’s a really interesting thing, being on one hand, a bookkeeper and accounting professional, where you’re looking at numbers every day, and you’re doing things very, very risk averse. And being an entrepreneur where sometimes you just you know, I mean, that is what an entrepreneur is right? Being willing to take risks, and being willing to not have failures, but learn from where you didn’t succeed, right? Everything is either a win or a lesson. So yeah, so I have a fun mix of both of those personality types. I have the entrepreneur kind of pirate and been willing to take risks and I have the bookkeeper, I have lists of everything and I know my numbers every single day and I think that from that I have a unique perspective to be able to help other business owners.

J Darrin Gross 4:48

Well, that’s great. The bookkeeping is also important. I know this in spades myself, and but it’s also But as exciting as insurance? Yeah, it’s but the importance. I mean, it’s what I find it is the kind of the score sheet that tells your story. You know, how the how your property is performing? Whether it be preparing for your taxes or working with lenders or or if even if you’re trying to tell a story to other investors. So, when when, when taking all that into consideration? I mean, just what, you know what bookkeeping is? How do you work with real estate investors?

Maya Weinreb 5:39

Yeah, I mean, like you said, bookkeeping is the building blocks kind of as for anything, next on finances, your insurance broker is going to ask for your p&l, a lender is going to ask for your p&l and investor is going to ask for a p&l, a tax planner is going to ask for a p&l. And if you don’t have that, you aren’t going to be able to do any of those things. So I think how I work with real estate investors is I just helped them get organized. So they have all of their ducks in a row, you know, we have many real estate investors that we work with. So we’re really used to it. And the best, most efficient way to keep the books, you know, we use QuickBooks Online. So we’ll create. And then real estate investors are funny, they’ll have one LLC that owns two properties. And then one LLC that has these business are these partners and this LLC that have these business partners. So you really need to be able to track all of those things separately, and you need to be able to run a p&l by property, you need to be able to run a p&l by LLC, you know, I need to be able to know all these things, and you need to be able to look at it whenever you need it, whenever you’re looking at, Okay, do we have enough profit to buy another property or you’re trying to get another you know, an investor or maybe another mortgage or whatever it is you’re trying to do, you have to have those papers at the tip of your fingers. And a lot of bookkeeping and accounting. Professionals and industries aren’t kind of keeping up with computer age and modern. And it might take you two or three weeks to get hear back from your bookkeeper or from your accountant and especially in tax season, but but all year long, because they’re not really set up both of them to be communicators, they’re set up to be you know, doing your books, and they don’t have time to talk to you and do your books. So I had to get really creative about that and and figure out how to have the business owners back how to be there for them. And to get the work done. And I actually had to go out, we got big enough, I had to go out and hire a customer service person just to be able to handle the communication and to keep up with the level that I promised my clients, which is we reply to all communication in one business day. So if you asked us for something we can get, you know, depending on what it is, but we’ll at least let you know when we can get it done. And if we’re doing monthly bookkeeping for you, or weekly bookkeeping, and you are asked for a p&l, and we obviously already did the bookkeeping, we can just send it to you in five minutes. You know, as soon as we see the email, if we’re doing quarterly bookkeeping, and you’re asking for a month that isn’t finished, you might have to give us a few days to get it caught up. But in general, you’re gonna have your information just right at the tip of your fingers. And I think that is very important for real estate investors.

J Darrin Gross 8:43

Yeah, absolutely having the information that’s readily available, as opposed to let me get back to you. Kind of a situation. So let me ask you this. This is one thing that I know, it’s been a frustration of mine. And I’ve talked with other investors. And I think that there’s some sort of, I don’t know, it’s a disconnect, or it’s just a kind of a translation of sorts. How do you work with the information of property manager provides? Because I don’t know that it’s always the same or consistent, I think I have I’ve run into different property managers that have their own little way of, of keeping score or, you know, we all know that rent is rent. You know, laundry, might be laundry or utility income might be you know, whatever those fees are, whatever they’re, they’re they’re keeping track of, but beyond that, the expenses and who’s paying what and categorizing all that stuff? Yeah, it’s almost like they create their own language. How do you how do you reconcile or work through that to help your your real estate investors?

Maya Weinreb 9:50

Well, I think probably because I’ve worked with so many different industries. I’m used to everybody having their own language and their own way that they Do it. And I think you’re right of our real estate investors that have property managers, we get the data all different ways, you know, some of the property managers will send a, they’ll send the net proceeds. And they’ll have paid a bunch of maintenance and, you know, different things out of it. And so they’ll just send us these, you know, Excel spreadsheets, or even sometimes handwritten on the back of checks or whatever, where it says what the money was, that came out. And in that case, we enter it in that way we enter in, I mean, in bookkeeping, you have to work backwards. So we would enter an end deposit for the gross amount and expense all of the expenses to the correct, you know, property and category. So where the net Check matches the net Check received, then there’s other property managers who do it the other way, they have an expense account, that is the real estate investors account. And so they deposit the entire rent amount, and then they have, you know, whatever, a debit card or a checkbook, and they pay things out that way. And then we have to track it like that. So it really just depends. It also depends, is this a multi unit property where you have, you know, 200, rent checks coming in? Or is this a, a house that’s being rented out? Or, you know, so it really depends on how the real estate investor set it up with their property manager and what information is needed? Because for instance, there’s not that they’re a real estate investor. But you know, adjacent, we have an HOA that we do bookkeeping, for, for an enormous property. And they have all of their bookkeeping in another software, not their bookkeeping, but their rental information in our portfolio, which other real estate investors use as well. And basically, the way they want it is they want QuickBooks to 100% match at folio, is that something I would recommend? No, because I think it’s redundant and unnecessary. And if you’re going to have a whole software that has all of your information, I would do QuickBooks just for tax purposes. So you just have income, you know, and expenses and not have duplicate work. But that’s what they needed, because they wanted the redundancy. There’s other real estate investors where they have a similar thing, and they’re using another app, I think the other one is building them. And they’re using building them, they’re using out folio and and that’s totally fine. But you don’t want to do in my opinion, you don’t want to do redounded double work. So give us the gross amounts, and the net amounts, you know what I mean? Like we’ll give us access to that software so we can figure out what stuff is. But you don’t need us to enter each check individually for 200 renters each month, you know, stuff like that. So we really work with whatever system the person is using, and then just recommend best practices to save them the most amount of money and efficiency and get them what they need.

J Darrin Gross 13:18

Sure, no, I just wanna make sure I understand the the, the 200 unit property, you’ve got a client that wants you to input every check for every tenant? Yes, well, I would think I can see the benefit of having, you know, the the gross amount of rent the the, you know, and then itemize the expenses below that so that you have a net deposit that matches what what you receive. And I think because I think you know, tracking all those expenses. You know, that, I think one of the things and again, I I’ve been guilty of the DIY kind of bookkeeping for a while until I realized that there was a smarter way to do it. Is it the Schedule E? Is that kind of the the the expenses that get tracked primarily by for tax purposes? Is that kind of the those categories? Is that kind of the ones that that you look for or that that the that you would pick up from the the property management software or bookkeeping records? Well,

Maya Weinreb 14:31

I forget which schedule it is honestly, on top of my head because I don’t do the actual taxes. But businesses in general all have follow the same laws as far as what is tax deductible, the you know, as far as the assets and the mortgages and the loans and things like that, that’s you know, what you’re tracking on your balance sheet, and your CPA is going to put those in in the most tax beneficial way for you hopefully, but as far as the expenses, it’s pretty much I mean, even just business to business, it’s going to be the same, right? Anything that’s a business expense. So the the utilities, the even the, you know, the business meal, the investor meetings, the promotion, the marketing, the vehicle expenses, all any home office expenses, that the real estate investor has all of those as well as the specific expenses for the property. So, you know, we’re always looking at how do we save you the most money on on taxes, and the best way to do that is to, honestly to have bookkeeping, so you’re not missing deductions that you should have, because you’re gonna forget, when people go out to eat with their business partners, and they don’t use their business card or whatever, they’re just going to forget that they spent that money. And that’s a business deduction. So if you, you know, we try to set people up for best practices. So that way, they are able to save the most amount of money on taxes. But at the same time, business owners and entrepreneurs and real estate investors are going to do what they’re going to do. And if they don’t use the best practices that we recommend, we’re still going to do the bookkeeping for them, it’s just going to take longer, so then they’re just gonna end up paying more money in for bookkeeping, and potentially more money for taxes. But we’re still going to help them and we’re still going to do you know the best that we can. So like I said, with this HOA that wants us to make everything redundant. That’s not what I would recommend. I think that cost them a lot of money to do all that double work. But that’s what the HOA needs. And so that’s what we’re doing for them. Whereas there’s other things where I tell my bookkeepers as I have a team of six bookkeepers that the client is not the expert in bookkeeping we are. So just because the client says, do this or do it this way. Or even when they say my CPA, that’s probably not what their CPA said they probably misunderstood it. And just because they want us to put the owner’s draw on the p&l doesn’t mean that we can or we’re going to, you know, we can work out what is what are they trying to solve? You know, what is the problem you’re trying to solve? Oh, well, I just want to know what I really have left at the end of the year. Okay, great. Let me show you how to get that. Or let me create a report for you that has that. Or let me show you how your statement of cash flow works, right. But they are not just going to do what they think because we’re the expert. And just like they might be the expert on real estate investing. And I’m not an expert on real estate investing. But I am an expert on real estate, investing bookkeeping. And so I will tell them the best practices, but I’m also going to work with them, I’m not going to say, Well, you didn’t follow my advice. And so I’m not going to do it for you, I’m just going to say, Well, you didn’t buy it, right. So this is actually going to take 10 hours longer than it would have if you did but I’m gonna do it for you just as long as you’re willing to pay for that.

J Darrin Gross 18:12

Yeah, no, I hear you the you know, everybody thinks a little bit differently kind of thing. But at the end of the day, if you’re trying to report to whether it be a bank or the, the IRS or, or, you know, there is a standard of information. That’s that’s expected. And I think that’s kind of the, you know, at the end of the day, what your numbers have to reflect and in some way, shape or form.

Maya Weinreb 18:39

And they will, they will at the end of the day, but it just like if you look at a p&l, it’s going to show you the top line information. So how much detail you want in that for instance, the p&l for the this Hoa is going to look the same whether I entered in rent check by rent check, or whether I entered in a gross you know, rent. So it’s just when you drill down how much information do you need in there and and I personally think that when you have industry specific software that’s tracking, you know, even for construction companies where they have their ARs and another they have their estimates and invoices and all that and another software, I don’t think it makes sense to duplicate that work and do it again in QuickBooks. That’s not necessary QuickBooks can do it if you’re only using QuickBooks for that. But otherwise, you know, use QuickBooks in the most efficient way that you can to get the information that you need for your taxes. Unless you’re managing your company out of QuickBooks. I manage my company out of QuickBooks as far as you know, I have all of my clients in there and all the invoices and all that but I’m not also using another software to do that. I have it all in one place. And for for property managing QuickBooks is not the best software for you know for. out again for like construction companies, I wouldn’t say that QuickBooks is the best software when there’s industry specific software that does all that. But that software doesn’t do everything that QuickBooks does. Because it’s not it doesn’t have the same purpose of QuickBooks, accounting and getting stuff ready for taxes. So you really have to just, you know, use music common sense. And B, keep it simple. If that’s my motto, keep it simple.

J Darrin Gross 20:30

Good, good rule for accounting. And that’s for sure. Yeah. So let me ask you this, what are the things that people miss the most.

Maya Weinreb 20:41

Um, I would say that, especially when you have your property managers send you net checks, people miss getting all the information. So they’ll give me just the net check amount. And this, this is across the boards on many industries, but specifically for real estate investing, they miss getting you all the information, and that makes your books wrong. If you don’t have the gross amount, then you’re then your income looks wrong. And that might not matter. For tax purposes, you know, if you if you’re gonna say, well, but the net amount is what is the net amount, and that’s true. But if somebody wants to see your p&l, your numbers are going to look deflated, if you don’t have your revenue in there correctly, and the expenses. And for instance, if you are looking for an investor, and you’re showing, here’s my numbers, and you don’t have any expensive and you just have a net income on the top line, and then you know, a telephone bill, and your and then your name come on the bottom, it’s not enough information for an investor to make a decision. They’re gonna say, Okay, well, this, how do you not have any expenses? Are you either not tracking expenses? Are you paying it out of net, and you’re not gonna really give the whole story. So you need to put in the gross rent tax or, you know, whatever money you’re getting in, and all of the expenses having to do with the property. So you’re telling the correct story to anybody looking at

J Darrin Gross 22:18

it? Yeah, no, that’s, that’s what I’ve been guilty of a long time ago, but definitely all of the numbers, they all have to be part of the story. Yeah. Because I

Maya Weinreb 22:31

have, I have personally, I have friends that are investors. And they will, they’ll tell me, you know, I looked at this person’s books. And it all looked good, you know, from first glance, but then I started wondering, why don’t you rent out a giant garage to store all of your equipment? And why isn’t that on your books anywhere, and then it came to light that? Well, it was because there it came out of over here, because the owner still owns it directly. And therefore, if I would have bought this, you know, or invested into this business, I would have had this other expense that I didn’t know about by looking at the p&l. So it’s, it just can cause you problems. It could make contracts, get cancelled for you know, incorrect information. I don’t know, whatever you call that bad faith, things like that. So you have to put all the information in there to set yourself up for success for so many different reasons. And, and it’s not even like I said, it’s across the board. It’s many industries, even things like when people get paid via stripe or square. And those third party platforms remove their fees before they deposit the money. People just put in the net amount. But that is not correct. That’s not your income, your income is the top line minus the expenses. So we have to go work backwards and put those in.

J Darrin Gross 23:57

Yeah. So what do you find that the things are the most people get confused?

Maya Weinreb 24:08

I think there’s a lot of tick tock advice these days. And it’s not that the tic toc advice is necessarily wrong, but that it only applies in specific situations. So you can’t take a piece of advice and automatically tell your CPA or bookkeeper that it applies to you. It might or it might not. Because so many of these things depend on Are you an LLC, are you elected to be taxed as an S Corp for Are you a C Corp where it was sole prop? What revenue level are you in? Do you qualify for that credit? Just because your friend did doesn’t mean you do. So if you know and I listen to this advice, too. I scroll through there and I Oh ha That’s a good point. And some of it is you You know, really good advice that people missed? A lot of it is really good advice. But the only thing is that it just doesn’t apply for every situation. So you have to work with a CPA, a tax planner, I mean, a bookkeeper. Yeah. So that your bookkeeper is gonna get your basics. If you come to your bookkeeper and say, Does this tax loophole apply? They may or may not know, because they’re not in the business of doing taxes or tax planning. They’re in the business of recording history of what happened in your company. So you have to have a CPA and preferably, or a tax preparer and preferably one that does tax planning. So you can sit down with them and say, Hey, Tiktok told me that if I rent my, if I use my property for business meetings for two weeks out of the year, I can take this deduction. And how do I do it? And what’s the best practice? And what’s the numbers? And then the taxpayer will tell you or your hopefully your tax planner, right, this is not all CPAs? Or taxpayers do tax planning will tell you Yeah, exactly. You should this is how to do this. Because you can’t just do it with no paperwork with no nothing like it, you can do it if it’s a legitimate tax loophole. But in order to not get audited in order to have this correctly, here’s how to implement that. Or, you know, I’ve heard on tick tock that I need to pay my kids payroll. Absolutely, that is a legitimate thing. But here’s rule that go with that your kids have to actually be doing something for your business, you can’t just pay them to pay them. Because you have to prove you’re paying them for something like I follow. You know, Grant Cardone them will 10x movement, I don’t know if you’ve heard of him, probably, he’s a big real estate guy. And he knows his kids, but he makes kids go on stage, and talk in front of 1000s of people. And that’s what they eat, where they get paid speaking fees. And that, you know, they get there in some of his promo, they have modeling fees, they get speaking fees, and legitimately they get paid. But if you have a two year old and you’re not at least using them for promotion and marketing, then you can’t legitimately pay them. So again, it’s not that I’m gonna say this advice is wrong. I haven’t heard all of it. Some of it might be wrong, but it’s use it correctly, get all of the rules and make sure that you are using it correctly and that it applies to you.

J Darrin Gross 27:33

Yeah, that’s definitely I love the inference that the Tiktok accountant is the Yeah, the superior. But that’s funny. So let me ask you this, what do you find that people do wrong? Um,

Maya Weinreb 27:52

well, I would say real estate investors are better than most industries, because they always have investors looking at their, you know, things on so they generally do have a set of books of some kind. But in general, I would say what people do wrong is not having bookkeeping, they try to wing it. I’ve talked to companies that have 700,000 revenue, and no bookkeeping. And she, you know, they’re stressing out. They don’t know. I don’t even know if I have enough money to hire another person. I’m like, Of course you don’t? How would you know? What do you what are you like gut gut feeling with. And as an entrepreneur, myself, and a bookkeeper? I just think, I just think that crazy, I don’t know how you could possibly live your life like that. That is, you know, that is more risk than I would be willing to take as an entrepreneur. So I think that having your numbers gives you such a sense of stability, and direction and peace of mind that trying to wing it all the time. Isn’t, you know, I mean, maybe some people just innately kind of know their numbers, and that’s great. But I think so I don’t know if this is what real estate investors do wrong because they generally have numbers because they had to, but not having the books Correct. Missing deductions, not having a professional to ask, just like real estate investors go to all these seminars and learn things about being real estate investors. They’re not doing that for bookkeeping, because why? Why should they? So you’ve got to get a professional to help you even if it’s just someone that can answer questions for you and get it right. Otherwise, it’s going to be a mess at some point and it’s going to be stressful and who wants to do that thing right before taxes are right before you need another investor where you’re spending three days hidden away with a pot of strong coffee and maybe something stronger and a box of receipts and your bank accounts. You’re smiling, like, you know what I’m talking about? Yeah, tax

J Darrin Gross 30:05

tax season, I know exactly what you’re talking about.

Maya Weinreb 30:08

Yeah. Let’s not do that. Let’s not?

J Darrin Gross 30:13

Well, in here’s, I think probably the question I want to ask you that, I think is probably the key to a lot of this, what’s the frequency that people are doing their books, as opposed to what you recommend?

Maya Weinreb 30:28

Um, that, I think it really depends on the amount of transactions and what’s occurring. You know, for instance, if you asked me how often a law firm or construction company or a marketing company should do their books, you know, I would have a different answer, a real estate investor that has a property manager, if they don’t have a property manager, then like, every day, you know, but if they have a property manager that handling the day to day for them, then depending on the amount of transactions and revenue, because you might be able to keep it up quarterly, you know, if you’re just kind of starting out, and you have a couple of properties, it’s not something that you have to look at every minute, necessarily. So maybe quarterly would be good enough, if you have several properties, you know, you would probably want to move to monthly. But again, it depends on if you’re doing it yourself, or if you have a team, you know what I mean? So there’s just a lot of variables, I would talk with the person and see what makes the most sense for them, their revenue, their amount of transactions, and whether or not they have a property manager, or they’re trying to be the property manager.

J Darrin Gross 31:46

I just said, I was gonna say, just kind of a confession, the more frequent you do it, the easier it is to catch anything that’s not right. And also fix it, or get it corrected. That’s what I found even like my property manager, like one time, they’ll record like a laundry income as like rent. The next time, they’ll, you know, and it’s still it’s all gross income, but still, like, you know, you’re talking, it’s nice to be able to isolate, and, you know, be able to tell the story to show exactly what this is and why it’s this and so that at the end of the year, when you have to report to the IRS, or if you’re trying to give the bank something, it all adds up. And you don’t have you know, the the 1099 you get from the property manager doesn’t match what you recorded. Because, you know, you didn’t you didn’t identify it as it happened, when it was something that could be, you know, updated, or they could they could correct that kind of thing. So, yeah, but

Maya Weinreb 32:53

this depends, like, what is it? Is it a rental property? Is it a property that you’re just holding, and you’re not renting? Like, there’s so many different things, that is still considered real estate investing? That it would just really depend. But yeah, I agree. I mean, I think, generally, I would say at least monthly, but again, if you don’t have a property manager, or if you need to be reviewing your property managers work, then even more often than that,

J Darrin Gross 33:26

yeah, well, and I think the other thing that I find with this is that, if you’re not in the habit of doing this, you need to get to a frequency to where it’s not. Now what do I do, you know, yeah, kind of thing. Because I’ve gotten, you know, stretches, where I thought I just did it and come to find out, it’s been three months, you know, since we sat down and input the stuff, and I do have a bookkeeper, but I work with her and that I will input the information, I’ll send it to her for, you know, to make sure that everything was recorded properly, or the way it’s, it’s supposed to, because I used to, you know, think I was doing a download from the bank and call it all good. And then at the end of the year, he would be like this, you know, I can describe at least three days of heavy, you know, dark coffee and you know, grinding my teeth and it’s like, Oh, my God, and then you’re trying to go back and find out what is this and what’s that and, and, you know, you’ve I’ve forgotten I couldn’t tell you what that is, even though I made notes on whatever they were you find the receipt or whatever, but it wasn’t so you end up missing the opportunity to tell the full story. Or you just decided okay, it doesn’t matter. I can’t you know, I can’t figure it out. So I’m not gonna worry about that. A little bit here a little bit there after a while it adds up. And

Maya Weinreb 34:53

and if you’re doing your own bookkeeping, which honestly I don’t recommend, but if you are, then Yeah, I mean, just take 10 minutes a day and do it.

J Darrin Gross 35:04

Well, let me ask you this because I think you know, there’s a point. And again, we have property management. So we get the reports from the property manager, then we we input it into QuickBooks, kind of the gross numbers like we’ve been talking. And then I have a bookkeeper I use on kind of just a periodic basis, say, hey, look, here it is, make sure it’s tight with the year end. I’m not like on Oh, my God, you know, whatever. How do you? Is there a frequency that you work with? Or is it do you? Or do? Do you have the capability of working with somebody similar to like what I do? Or is it all or nothing like we do everything or we can work with you?

Maya Weinreb 35:48

Here’s, here’s the thing, the honest answer is that it’s best done right the first time, and that’s the fastest way to do it. So what your bookkeeper may or may not be telling you is that the amount of time that it takes to fix things in software and in QuickBooks is at least three times longer than it takes to do it right the first time. So if you’re doing it yourself, and then they give you a kind of list of things to fix, and you know how to fix it, then that’s one thing. And if you’re trying to do that, for the purpose of saving money, if you’re at the point where you just hate bookkeeping, like, honestly, most people I talked to, or you just don’t have time for it anymore, then it makes more sense to just have the bookkeeper do the entire process, because it’ll be most efficient that way, where it’s not going to be a bunch of going back in and fixing. And that’s the thing that I run into, you know, like, they talk about that, that you see these posters and different trades, like, you know, hiring me to do this for you $100 An hour or doing it while you watch $200 an hour, doing it with me $1,000 an hour, whatever stuff like, it’s kind of true, because we’re going to get it done, right. And if we have to go in behind you and fix what you’re doing, it honestly takes longer. And we do have clients that do that. And they prefer to do that. And I just tell them, Okay, but we do charge more for that our hourly rate is higher for doing, you know, reviews, kind of consultation type stuff, but but we’ll do that, if that’s what they really prefer. They want to go in and do their own bookkeeping, and then they want us to go in behind them and review it and either tell them what to fix or fix it ourselves. I just don’t know that they ended up really saving any money that way. That’s

J Darrin Gross 37:46

Oh, sure. No, and I’m not suggesting I’ve figured out how to save money. It’s more a matter of, I think probably more than anything, it’s a habit of the way that I started doing certain things. And I worked in originally worked in quick in and then graduated to QuickBooks and still have some that aren’t quick. And so it’s kind of a mishmash of, of but you know, each property, each entity, kind of thing. And I will say this, I’m blown away by how, how much more you get with QuickBooks than quick and I you know, quick, quick ends, basically a checkbook register it’s not, does not have the tools at all, or it doesn’t it’s, uh, it doesn’t speak the, you know, the accounting language like QuickBooks does. So,

Maya Weinreb 38:33

right. Yeah, it doesn’t at all, and neither does some people try to use QuickBooks simple start, or sorry, I take that back QuickBooks self employed. And that doesn’t speak the accounting language either. That’s, that’s kind of like if you have an Etsy company on the side that makes a few $1,000 a year, then I’d be like, okay, yeah, I use self employed. But anything else, you need to use a real version of QuickBooks at least simple start, if not, you know, essentials, that has all the tools that you need,

J Darrin Gross 39:03

ya know, and get it set up, right? Yeah. Don’t don’t create the problem and then say, hey, Maya Help.

Maya Weinreb 39:12

Yeah, I will help. I always help. I don’t turn people down. But you know, depending on what the problem is, I will charge them more or less, to fix it for

J Darrin Gross 39:22

them. Right. Right. I know that the setup is key. i That’s the one thing I figured out that. Don’t attempt to do that on your own. You don’t know what you’re doing.

Maya Weinreb 39:32

Yeah. But also, just to answer your question earlier, you know, I do still my own bookkeeping for my company. I’m actually training someone right now to take that over from me because I thought that one day, maybe my bookkeepers who work for me could take it over and then I realized, no, they’re too busy doing bookkeeping for clients. So I’ve been doing it myself, but I like to know my numbers every day. So I just go in and do it every day and it takes me about five to 10 minutes And then it’s done, you know, and, you know, once Well, probably not once a month, but you know, I go in and reconcile and keep everything up to code for my CPA, who then files my taxes. And, you know, tells me things as well, like, oh, you need to blah, blah, blah, Sure, okay. And I can go in and fix it, and I can do anything that’s needed. But yeah, if you’re doing if you’re good at bookkeeping, and you like it, then just go in every day and spend 510 minutes on it, you know, and then you have your numbers to him. But if you can’t do that, or you don’t like it, or you don’t have time, or you don’t know how, then write everything down on the receipt, scan it into your QuickBooks out, your bookkeeper will be able to code it per property per LLC.

J Darrin Gross 40:48

Yeah. Well, again, I think what do you just kind of reiterate is that frequency thing you’re going to be if you’re going to be you are responsible for doing the bookkeeping in any way, shape, or form. Do it as soon as possible rather than so

Maya Weinreb 41:04

Yeah, exactly. But if you get in the habit of doing it, either every day while you’re having your, you know, morning coffee, or let’s say you take your kind of, you know, administrative tasks day and you go Sunday, I sit down and, and do QuickBooks and coffee, then that you knew how to put it in your schedule. But otherwise, yeah, you’ll forget. And it’ll be three or four months. And you’ll be like, Oh, shit, sorry, I’m not I don’t know, if I’m allowed to swear. I didn’t do my bookkeeping. And now I don’t remember what any of these things are. And I don’t remember I knew I was, I made a mental note to remember why I took that $350 out of the ATM. And now I have no idea what it was for because it was four months ago. And that’s where you lose tax deductions.

J Darrin Gross 41:49

Guilty, guilty guilty. Hey, Maya, if we could, I’d like to shift gears here for a second, by damn an insurance broker. And as such are worth my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first looked to see if there’s a way we can avoid the risk. And that’s not an option. And we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, we look to see if there’s a way we could transfer the risk. And that’s what a an insurance policy is a risk transfer vehicle. And etc, I like to ask my guests, if they can look at their own situation can be your clients, real estate investors, the tax code, whatever that you think of or would would like to identify that you consider to be the biggest risk? And again, for clarification, while I am an insurance broker, I am not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Maya Weinreb, What is the Biggest Risk?

Maya Weinreb 43:05

Yes, I thought about this, I thought about this. I think the biggest risk right now, for real estate investors, for clients, for entrepreneurs, for individuals, for everybody right now, is the fact that the IRS just hired 87,000 new auditors. And you know, we saw articles about that a lot at the end of last year. And I don’t know if they’re all hired, and they’re all implemented. But what does that mean to an individual? What does that mean to an investor? That means that they’re, they’re 87,000 times more likely to get audited, at least not saying I’m a mathematician, so maybe me No, that’s not the exact math, you math it. But to me, that’s 87,000 More people who could potentially go and audit your business, your investments. So it just makes it so that all of the things that you’re supposed to do that you kind of said, well, no one’s ever audited me and it’s never really been a big deal. Now is the time to get all of your ducks in a row. Because you are have to map it correctly. Let’s just say there’s 87,000 More people who could try to audit you than there were before those 87,000 more resources to do that, because the IRS doesn’t have time to deal with all of our stuff. Right? They’re they’re busy going after big fish. And we know ways. You know, there’s many tax strategies to minimize risk to not look like you have a bunch of red flags that might get audited, and that’s great. So we want to keep doing all those things. For instance, if you have an S corp To make sure you have payroll, that’s the biggest red flag, you know, a lot of real estate investors aren’t S corporations, their LLC, and so it’s different. But sometimes they have holding companies that are s corpse, things like that. And if the IRS audits, you, they’re gonna want to see your books, they’re gonna want to see receipts for everything, they’re gonna want to see bank statements. And on things like business meals, or whatever, that a lot of people not gonna say, a lot of people, some people every time they go to dinner, or have dinner by themselves will consider it a business expense. And the IRS is gonna want you to prove that it was a business expense, and who you went to dinner with. And that needs to be, you know, written on the receipt or in your books for it to make sense, your 1099 that you’re like, Well, I’m not going to turn 99, the plumber because it’s never really been that big of a deal. It might start being a big deal. There’s there are rules written into the IRS code of what happens if you don’t file a 1099 on someone, and you allow you know them to work for you under the table. And it’s not that big a deal. There’s rules and there’s big penalties, there’s penalties for filing a late 1099, there’s penalties on not filing a 1099. And they have not that I know of to this day actually implemented those penalties because they haven’t really had time to deal with all of the 1099 filing, for instance, as an example. But now they have 87,000 More people who might be taking a look at that. And in the IRS being the IRS, if they find something that you did wrong, they might try to go backwards and audit you the last seven years. So now is really the time to make sure that we have all our ducks in a row, that we’re using the same tax return to get our investments that we use to file with the IRS that we are filing our 1090 nines on every single person that’s a service provider, that we have detailed receipts on everything. And I think that while I hope that we can continue, you know, just being risk averse, and and not creating things that are red flags, I don’t know that that’s the case anymore, that might be changing. They might be you know, I’m really trying not to swear, they might be getting harder on us. And so in order to avoid risk to mitigate risk to minimize risk, you got to have all your legal bookkeeping, IRS ducks in a row. And I don’t mean to say that there’s some big monster that’s terrible and scary, because they’re not. And they’re all you know, pretty much all IRS agents and auditors are nice people and they’re helpful and they’re just doing their job. And it’s not to say don’t go make money or go hide in a corner, you know, make money, they can’t talk to you. If you’re not making money, go do something, you know, go go buy that property, go do that cool thing you’re doing. But just have all your ducks in a row so that nothing can ever come back and build, you know, tear down your empire that you built.

J Darrin Gross 48:22

87,000 new IRS auditorsm, definitely something to be concerned with. Maya, where can listeners go if they’d like to learn more connect with you?

Maya Weinreb 48:34

Yeah, my website is SolvencyNow.com. And they email me at maya@solvencynow.com. That’s ma y A and solvency now is Sol VCY, n o w. So my solvency now.com. Or you can check out my websites, SolvencyNow.com. You can click on there for a free consultation. I also do webinars every week that you can go to my YouTube page. As far as I think you can get to through my website. You can find me on Facebook, either under my eyeliner or solvency now, bookkeeping, Instagram, LinkedIn, tick tock, I hear tick tock and right now I’m just kidding. I just tell people to file there’s headline memes and pretty much you can send a smoke signal and I will help you I really I personally have a purpose and helping business owners and entrepreneurs succeed. My mission statement for my company is complete and perfect financial records for your peace of mind. So I’m really I really want to make this area less stressful for people and I’m doing it as a you know, tech company and not as an old school kind of accounting will get to you when we get to you style. So we’re I’m really really here to help people and that’s what I live for. So yeah my solvency now dot com solvency now.com. Or I’m not on Twitter, but pretty much any social media either under my Weinreb or solvency. Now, bookkeeping, you can find me and send a message and I will reach out, reach back out to you and schedule your, your consultation.

J Darrin Gross 50:19

Great. Maya Weinreb thank you so much for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Maya Weinreb 50:30

Yeah, thank you so much for having me. I hope this was helpful to your listeners. And I do hope to do it again as well.

J Darrin Gross 50:39

Great for our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks, CRE PN Radio.

Announcer 50:59

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How to Use Inflation to Your Advantage with Bronson Hill – CRE PN #411

Bronson Hill 0:00

When it comes to using inflation, to your advantage, you know, I think a lot of us you see the pain at the pump, we’re, you know, paying more money for food, we’re paying more money for lots of things. And we feel we see we feel the pain of that. But the goal is how can you get on the other side of the equation to where as inflation goes up, you actually benefit in real estate is one way to do that. Because typically, you know, if you have debt that’s below the rate of inflation, which officially is six 7%, I think it’s more like 15% If you look at actual costs, so as long as your rates are below that, I think you’re still doing okay, are still doing still doing well. But there’s really two things you’re if you buy real estate or assets that pay you to hold them, you’re cash flowing while you hold them, but you’re borrowing with other people’s money. If you get a 20% or 30%, whatever the money you put down, you get an increase in the value of the property, you know, loans, your your, your value hasn’t gone up by 2030, or your equity has gone up by 23%. It’s a lot of doubled. So that’s an awesome thing. And you’re also paying off the loans with future dollars that are worth less right because of inflation. So it’s kind of a double positive. That’s why people most people become very wealthy, become that way through real estate. So I still love real estate, I still have assets that pay you to hold them and be able to use debt to use inflation to your advantage.

Announcer 1:18

J Darrin Gross 1:37

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J Darrin gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s program is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment in catastrophic loss. The experts had building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to BuildingInsuranceRisk.com.

Today, my guest is Bronson Hill. Bronson is the Managing Member of Bronson Equity. Bronson is a general partner in 2000 multifamily units worth over 200 million and CO leads a large inperson multifamily meetup in Pasadena, California called FIBI Pasadena Multifamily. Bronson is also the host of the Mailbox Money Show Podcast. And he understands the investor mindset. Having spoken individually over the phone with over 1300 investors and having raised over 30 million for real estate and his ATM machine fund deals. Bronson is the author of How to Use Inflation to Your Advantage. And as a regular contributor to YouTube and his blog. He is also the capital raising coach at Kingdom REI, a faith based group, helping investors find deals and raise funds for large real estate deals. And in just a minute, we’re going to speak with Bronson about how to use inflation to your advantage.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest Bronson Hill. Welcome to CRE PN Radio.

Bronson Hill 4:23

Darrin, excited to be here. I love talking about real estate and there’s a lot to talk about. So looking forward to talking with you and having a great conversation.

J Darrin Gross 4:31

Well, I’m looking forward to it as well. Before we get started, if you could take just a minute and share with listeners a little bit about your background.

Bronson Hill 4:40

Sure. Yeah. So I was a well paid medical sales professional making over 200,000 A year and I enjoyed it. It was good. I was going into heart surgery with surgeons and selling different devices in the operating room. And I yet I really saw myself you know working too many hours, as well as a lot have physicians that I worked with some were making really good money, I had a couple of cardiologists that were making, you know, over a couple million dollars a year, and yet they were working 60 or 80 hours a week. And I just thought, you know, this, that’s not really financial freedom. To me, financial freedom really involves freedom of time. And so I began to kind of explore how can I become financially free and in real estate was definitely an interest. I’d been doing some single family investing in another area where I had been kind of became an accidental landlord, and that it worked out well. So I started buying houses. And then my goal was to get, you know, 30 of these houses and Cleveland where I was buying houses. I live in Southern California, but I was buying houses with a partner in Cleveland. And I have a cousin who I just hadn’t seen in years, and he’s he’s a multifamily guy. And he said, you know, this sounds like a lot of work, why don’t you do multifamily? And I said, Well, I’d love to, but I don’t have the money. And he said, Well, you can raise the money. So I learned about syndication, which is basically just a fancy way of saying, you know, raising money from individuals putting it together to buy a larger, you know, investments such as a large apartment building. So it just kind of started slowly. I mean, I look back now, last four or five years, it’s just gone vast, and I’ve learned a lot, I was able to leave my great corporate job and replace my living expenses and my income. And so I love talking about real estate, talking about investing, talking about helping people, you know, diversify outside of the stock market. And so it’s been it’s been quite a ride.

J Darrin Gross 6:23

I always appreciate hearing about where, where people start and kind of the journey and, you know, appreciate you sharing that with us. I’m curious. So how long ago did you first get started doing the single families?

Bronson Hill 6:40

So I started, I moved to the state of Montana for a job. I was out there for a couple years. And the job ended. So I had a house, they decided to keep it. So that was in 2006. I purchased the house. And then in 2008, I’ve been moving away. But I had it for four years, over 15 years, or about 15 years, and then ended up selling it not that long ago. So I guess, yeah, about a couple of years ago. But that’s kind of how I got started

J Darrin Gross 7:05

Got it. And then how recently did you start after talking to your cousin into the multifamily?

Bronson Hill 7:12

It’s coming out in five years. So it hasn’t been that long. But I just, you know, was really curious. He said, read this book, go to this conference. Listen, this podcast, I did everything he said. And before I know it, I you know, started started a meetup in Southern California, found my first investor there who invested 100k, I was able to about six months later meet a partner who had a big platform, but wasn’t really raising money. And so we started raising money, we raised about 15 million together over the next 18 months. So there’s been some different, you know, journeys. Last year, we raised about 13 million. You know, again, this all just sounds so weird. somebody’s listening, like I just sounds that for a lot of money. And it’s like, Yeah, that does sound like a lot of money. So it’s, it’s, it’s something that doesn’t happen right away. But it’s something that’s happened just progressively over time. And it’s been kind of it’s been really fun to watch. Because it’s you know, here I’m able to partner with helping people grow their wealth passively outside of the stock market, which involves less volatility and risk and better returns, and then I’m able to grow my wealth as well. So it’s been really fun to see the alignment of interests as we get together.

J Darrin Gross 8:12

Yeah. So in the last five years, how many deals have you guys been able to participate in that have gone full cycle.

Bronson Hill 8:20

So we’ve had four that have gone full cycle, we’ve had a couple perform right about at projections, around 15% per year, two to three year holds, we had one that was about a 26% return for two and a half year hold. And we had one that was we had about 80%. And you know, IRR in 10 months, we’re just kind of an outlier, but we just had one that we bought at the right time, and everything’s for sale at the right price, we got a great offer, we end up selling it, and 1030 wanting or doing a tax exempt exchange into another property. So but yeah, so we like to provide, you know, predictable returns for investors.

J Darrin Gross 8:52

No, that’s great. So, in the last five years, it’s been, you know, kind of low interest rates, compressing cap rates. You know, it’s been, there’s been kind of a fury of sorts in that, you know, there’s always been somebody wanting to buy the deal, because they want to get in kind of thing. And today, we’ve got the Fed trying to tamp down the inflation rate. And as just a point of reference, we are recording this on March 1 2023. And I believe the Fed has another meeting scheduled this month. And, you know, my question to you and kind of the topic that we are open to talk more about is how to use or how to make inflation work for you, or how to use inflation for your advantage. So with that, you know, and again, also coming from the environment we’ve been in with Low inflation and and relatively cheap money. And a lot of a lot of capital. What are some of the differences that you’re seeing here in the last year? In the kind of let’s talk about the deals and also capital raising? Are you seeing? Is there any difference in the interest and or the participation from the people that you’re talking with about raising capital?

Bronson Hill 10:28

Yeah, I think it’s, I think it’s changed completely from where it was a year ago, I just did a panel with a guy named Neil bawa and Ken McElroy, a few others, and Nick came up that there was there’s been a 78% decrease in the volume of sales of large multifamily buildings. That’s really significant. I mean, that’s, you know, that’s like a, you know, like a fifth about what it was a year ago. So, you know, that’s, that’s pretty significant. I think when it comes to doing deals, it’s harder to find deals that work. Because interest rates have gone up, it’s been more challenging. So you know, a lot of times you’re having to look at deals, they were turning less than what you know, they were a year ago, just because of the interest rates being higher. Also, a lot of times the lenders are asking for more money Downs is that a 20, year 25%, down, it’s a 30 35% or higher 40% down. And so you have, you know, those really squeeze your cash flow. So again, you have to put more money down, you’re paying more for interest as well. And investor sentiment has changed to where it was easier to raise money. And now it’s, you know, twice as hard to raise or, you know, we’ve already raised the same amount of money. So it has been interesting when it comes to new multifamily deals, now, we’re really focused on the ones that we have, and the ones that, you know, we’re we’re trying just to make sure that, you know, we can operate well, my friend, Ken McElroy, says 2023 is the year of operations, I mean, it really comes down to especially when it comes to a value add deal, which means you know, for those unfamiliar, it’s you can buy brand new apartments, where you know, they’re they’re built in the last 10 years, there’s really not much to improve. But if you buy something that’s a little bit older, you can come in and do renovations, for example, in Jacksonville, where we have about 1500 of our units, we can come in and do okay, rents are $1,000, we know if we put $6,000 in per unit and do a light renovation, we can see rents go to about 1500. So it’s about a 50% upside, which is which is great, it’s just we’ve got to make sure that we’re able to do that and be able to sustain with the cash flow, and be able to really be able to grow that property. So So I think there’s there’s some new challenges that we haven’t really seen, in the past, it has it has changed a little bit, we’ve shifted a little bit to move least right now into more focusing on our ATM machine Fund, which is a very predictable cash flow, investment, monthly payout. You know, it’s been great. We have a carwash deal we’ve done we’re looking at an oil and gas technology deal. So we have some other things that we’re doing that are kind of in the alternative space. When it comes to using inflation, to your advantage. You know, I think a lot of us, you see the pain at the pump, we’re you know, paying more money for food, we’re paying more money for lots of things. And we feel we see we feel the pain of that. But the goal is how can you get on the other side of the equation to where as inflation goes up, you actually benefit and real estate is one way to do that. Because typically, you know, if you have debt that’s below the rate of inflation, which officially is six 7%, I think it’s more like 15% If you look at actual costs, so as long as your rates are below that I think you’re still doing okay, are still doing still doing well. But there’s really two things your if you buy real estate or assets that pay you to hold them your cash flowing while you hold them, but you’re borrowing with other people’s money. If you get a 20% or 30%, whatever the money you put down, you get an increase in the value of the property, your you know, loans, your your your value has gone up by 2030, or your equity has gone up by 23%. It’s a lot of doubled. So that’s an awesome thing. And you’re also paying off the loans with future dollars that are worth less, right because of inflation. So it’s kind of a double positive. That’s why people most people become very wealthy, become that way through real estate. So I still love real estate, I still have assets that pay you to hold them and be able to use debt to use inflation to your advantage.

J Darrin Gross 14:14

Yeah, some of the I think the characteristics of inflation, I think are I think, I think for a long time we were not really concerned about nor did we it wasn’t it wasn’t really a concern. I think the Feds goal was always to have inflation at two to 3%. And I think for a long time there was like 0% inflation. I think a lot of people got kind of used to that. And it’s more about just getting in and out of a deal. The operations weren’t as critical as much as it was the ability to get out. And there was a line of people want to buy your deal. Kind of thanks to the that the you know, using inflation and in some of the tools that are some of the benefits of real estate provides. We’re not aren’t as much understood or needed, as much as I believe they are more now, just based on, you know, this inflationary cycle, I’m curious, you mentioned some of the hold cycles that you have exited on some of the properties that sound like they’re, you know, as low as 10 months or or 10 or 12 months kind of thing. What are you see the whole cycles like expanding as far as longer hold time and some of the deals now, and and then also, I want to ask you a little bit more about your your, your ATMs and the the carwash is how they operate in comparison to the multifamily?

Bronson Hill 15:43

Yeah, so your first question on hold, you know, hold legs. You know, Warren Buffett has a saying the best holding period is forever. And I’m a warren buffett fan, even though Warren Buffett mostly invest in stocks, I’m not a huge stock investing fan in general. But I think there’s a there’s a great principle that right, you know, being able to hold for a long time well, about 85% of debt for large multifamily over 100 units is considered bridge debt, which means is typically two to three year two to four year type of stuff. And, you know, this is from, you know, REITs that are, you know, doing large deals, which they, they’re a little different, because they can always go into the market and raise more money through selling more shares. But for a lot of syndicators, a lot of people, there is some challenges there, because, you know, for a lot of people, their their debt is coming due, and if it can’t increase the income enough, they can be in a place where they are in trouble when they’re trying to get a new loan, or they’re trying to extend their loan. And lenders are going to be more picky and say, Hey, we just want you to, you know, hold, you know, put another 500k in an escrow account, just because we feel uncomfortable with what’s happening, and you have to do it. So, and that’s a challenge. And then there’s these situations of cash calls or other things that people you know, kind of could come up. So I think that, you know, it is it is challenging. I think that, you know, ideally people say, you know, I remember thinking, Well, why would you just get, you know, fixed that on everything, that just doesn’t make sense. Because whether your house you’re going to 30 year fixed? Well, the fix that typically we found is is typically five to 10 year agency debt. And if you sell early, there’s some disadvantages of it, because you can pay prepayment penalties, which can be in the millions of dollars. And so and we’ve paid them, you know, we’ve sometimes had deals where we’ve sold and you know, two, three years in and we sell them and it still makes sense to sell them, even though we’re paying millions of dollars of prepayment penalties. So I think there’s some real challenges when it comes to doing deals now, or at least at least with the lending side. So we’ll see we are seeing some deals now starting to have some pain there. Particularly some of these larger kind of class a newer properties, were seeing that there was a $500 million portfolio, a group called Veritas investing this in San Francisco, and they defaulted on a $500 million loan, right. And so we’re seeing that around the country in different ways. And it makes sense, it makes sense why that would be happening. So So where we are seeing some different pain in different areas, as far as shifting into some different things, and we just try to find, Hey, how can we manage what we have? And what are the what are the opportunities now for investors, my thought is if you’re sitting in cash, which a lot of people are just sitting in cash waiting, I really think the CPI is not a correct number. We call it some people call the CP lie, where it’s actually been changed several times since 1980. And if we use 1980 metrics, there’s a site called Shadow stats.com. And it says that if actual inflation that’d be about 15%, but they will substitute items in saying if you’d like apples in the price of apples doubles, they say well, you would switch to oranges at the same price, there’s a lot of substitution that happened happens. They also say things certain things are temporary. Or if you have a apartment or you’re living in an apartment, it’s a two bedroom and rent goes from 1000 to 1200 they say well you would move down to a one bedroom so they basically just kind of fudging these numbers to make them look good. And I think it’s really for a lot of people it’s kind of been like the Wizard of Oz pulling the you know, like pay no attention to the man behind the curtain. So when we actually look at things, I think it’s actually a lot worse than what it appears to be and really since the Federal Reserve has been in existence since 1913, the dollar itself has lost 98% of its purchasing power which is really hard to believe so when I go to you know In and Out Burger in Los Angeles was a great burger joint you know, you can see on the walls here burgers are 10 cents and I talked to my daughter is 10 years old. And you know, I say well, why didn’t why do we want to pay $3.25 for a burger is a burger just cost that much more as though that the dollars are actually worth less. So I think those are all kind of trends and things that are happening and I kind of jumped around there a little bit from multifamily.

J Darrin Gross 19:40

I think but even just the perspective of inflation, I think, you know, it’s hard for certainly young people, but even myself I there’s an attachment point to the price of something that i i get comfortable with. You know, you mentioned the 10 cent You know, hamburger, or whatever I mean, I can, I can remember, as a kid buying a grilled cheese at the snack bar for 10 cents, you know, at the bowl, and it was just, you know, that was kind of the, I mean, you could feed a family for five bucks. I mean, it was just, you know, that he was, he was, he’s just, you know, crazy cheap, but like you said, if you’ve lost 98 98% of the purchasing power. That’s why now let’s say meals, you know, 60 bucks or whatever, compared to Yeah. But, but I guess the the, the question, and I think this is kind of, you know, where I think the the benefit of real estate, I’m kind of curious on your perspective, you know, with, with, if you have, if you’re holding cash right now, and inflation is, you know, in 15%, and you’re not earning any interest on that, you’re essentially going backwards. 15% every year. Right? Right. I mean, so you’re, if you have 100,000 Now, it’s not, it’s essentially 85,000, he combined with, you know, the same things with 85,000 Could a year ago, where is real estate, kind of like what you’re talking about, with that leverage, you know, if you’re, if you’re buying a, you know, $10 million property, and, you know, say you did get in at with a 25% down payment, even though now, you may need 35%, you if your rents go up, and your net operating income goes up, you know, there is the hope that the value will will go up, at least the rents will keep going up, to keep up with inflation. And you’ve got that sum. I mean, you’re in something that’s an appreciating asset, and being leveraged into a yearly, you, you like you described earlier, your, you know, your exit point is a multiple not just directly proportionate to the value kind of thing. So, I think that’s, that’s the, the earliest one I see. I’m just kind of curious if you have any kind of, you know, other other thoughts on that, as far as how, you know, the benefit of being invested in a, an asset that’s going to appreciate, or at least keep up with inflation?

Bronson Hill 22:24

Ya know, in general, I mean, I could show a trendline from there’s a chart from Mother Jones about rent and inflation that they really go hand in hand. So since 1960, there’s a slight lag in actual rents versus inflation. But there really are, there’s a trend line, and it just, it’s almost in tandem, and you think it makes sense, because most people are renters, you know, a fair amount of people in the US are renters. I think it’s maybe it’s slightly more own than rent, but especially in metros, it’s a lot of renters, larger metro. So I think, you know, in general, if, if, you know, we’re looking to do is say, if I, you know, the question, really, my friend, Jason Hartman says, you know, compared to what, so if I leave cash in the bank, if I have just money sitting around or having in stocks, will stocks and bonds lost. I mean, if you had a 6040, stock and bond portfolio in 2022, you lost 20% of your value, just just in one year. And so a lot of times these things that we consider safe, traditional investments, I was actually an investment advisor for a number of years. And I just saw, you know, really, what Wall Street says is safe is really not that safe, versus buying things that we know, yeah, in five years or a number of years, you know, rents are going to keep rising, because they just can’t help but keep creating currency. And, you know, it came out that the federal official debt is around 30 trillion. If you look at all the obligations that aren’t quantified, it’s over, I had to get something like 120 trillion, or it’s just some huge number, they can’t quantify how much how much is Medicare, you know, obligations, how much is that worth, but you know, just this, you know, for over the next 10 years, the current administration said, we’re going to spend basically a two, it’s gonna be a $2 trillion deficit each year, over the next 10 years. So there’s no plan to like stop spending or slow it down or anything. So if we know that is going to happen, even if we go into recession, we know generally, even if there’s some kind of ups and downs, rents are going to continue to rise. And so I think over the long term, you’re looking at these trends, making sure we can obviously perform, we can manage, you know, properties well and things like that and work with good operators or, you know, we’re going to separate ourselves or you know, somebody’s investor looking at that, but I think it’s just really important to look at, compared to what you know, if I’m waiting for a deal, a lot of people Bloomberg came out with an article late last year saying Americans have in their bank accounts over $5 trillion, which is an all time high, the highest before that was 1.2 trillion. So it was basically it’s been about a four times what we had just a couple of years earlier. So most people are just kind of sitting on the sidelines with money in their bank account, and inflation actually is 15% now If you wait two years, you could lose 30 to 40% of the purchasing power. We’re gonna say, Well, I’m waiting for a deal. I’m waiting for a deal? Well, I don’t know, are we really going to see a 30 to 40% decline in the value of real estate, it could happen. But in the meantime, your cash is losing value, and you’re not cash flowing from what you maybe could be cash flowing in an a deal. So I think I think that’s one of the reasons we’ve looked at it saying, Well, what can we do right now that makes sense, it’s harder to find multifamily deals that make sense. But that’s why we’ve really, you know, our ATM fund, you asked about that earlier, I mean, this is a it’s the fifth largest operator of ATM machines in the country. It’s a monthly payout, it’s it’s a high return, you know, the operator has not missed or reduced the monthly payment in over 10 years of doing it. It’s amazing how it’s digital. As we become, there’s a segment about 5% of the population that operates in cash all the time, and the number of transactions has at least doubled in the last 20 years. So who is that? Well, it’s typically immigrants. It’s people that our cash workers or people that get paid under the table, people that get government benefits, which now come on debit cards. And so there’s all these people that you know, Digital’s were becoming people that people are still operating in cash. And so we’re seeing that and so it’s been a fun investment to be a part of

J Darrin Gross 26:10

it. Tell me a little bit about the show you guys basically raising capital to invest in the the company, then are you actually own Do you own machines? Or how’s that? How’s the? Yeah, so

Bronson Hill 26:21

this is the fifth largest operator in the country, about 50,000 ATMs, there’s kind of two types of ATM owners, most of them are mom and pop that might own you know, 100 ATM machines in LA, or in St. Louis, or whatever. And then there’s a couple of very large publicly traded companies that are multibillion dollar companies. This group is kind of in between those two, right? So it’s good to be to feel like it’s kind of a sweet spot. But how it really works is you know, we go into an establishment where there’s an existing, you know, ATM, and then we say, Hey, how’s it going with the ATMs? Oh, we’re happy with it. Usually, there’s a split the establishment, maybe it’s a, it’s a bar or a gas station or something, they get half of it, typically around half of the fees. And then the operator gets the other half. And so what we do is come in and say, hey, you know, we’d love to get you a new ATM machine. And I’d be great and say, Okay, we just need to sign another seven year contract, we can get you another new ATM. So most people Oh, that’s great. Sounds good. So we bring in an ATM and locks them up for another seven years. Now that cash stream is secured. And it’s, it’s surprising when you think, Well, I don’t use an ATM, I’ve never used it. A lot of people that invest in ATMs are not the people that are actually using them and paying fees. I don’t use ATMs and pay fees, unless maybe I travel internationally. But even then I try not to, but there’s some people that don’t take it out 40 to 100 bucks, once a week is just kind of the way of life. And so paying a $2 fee or two $3 fee is not really seen as it’s just a part of life. Right for a lot of people.

J Darrin Gross 27:43

Is is there? I guess a you know, you kind of answered the question, even in kind of your setup here, the just the kind of the population that that uses cash. I mean, that’s not that’s not going away, that are not often going to Bitcoin, or some sort of I mean, the digital currency, I guess the alternative would be a credit card or, or, you know, some sort of a, just a plastic kind of a deal. But, you know, I’m curious, I mean, I guess people are using cash machine have to be banked. Right. And you have to have some sort of bank relation to get the cash. You know,

Bronson Hill 28:22

sometimes sometimes I you know, the the ATM is really becoming the bank for a lot of people because you think about immigrants, or you think about people that are using ATMs. What’s the reason? You know, sometimes it’s too, you know, I mean, I’m just thinking out loud, but you know, for benefits, you know, maybe they want to not only have privacy and be able to use cash the way they want to use it, or it could be that you know, you call them kind of the unbanked or the underbanked. So for some people, it could actually be their bank, they could have a cash prepaid card, or some something like that, where they they load money on the card or, and that’s kind of a way that they do it so that you can do their transactions, they can send money, even internationally through a lot of these ATM machines. And so so we’re we’re seeing your usage is still there, they’re I guess, the primary risk I was looking at, in any investment or all, you know, what is the what is the main risk? And I think for that one, it’s just will people stop using cash or where they will go to a central bank digital currency? I think it’s highly unlikely that they will, we will do away with cash. Because I think that there’s two reasons. One is an issue of privacy. People say, you know, you gotta be able to operate in cash. So the government can’t see everything you’re doing in any transaction. Right, that that’s kind of a privacy issue. So politically, on the right, people would say a privacy’s important, while on the left politically, people would say, Well, who is it? Who would this actually hurt? If we did away with cash? What would hurt the immigrants, the, you know, the low income folks would hurt people that they would want to protect? I think I think politically there’s no will to do with cash. And so I think, actually, there’s, you know, many countries of the women it’s like some, like 12 countries of the world use us cash as their primary source of funds. And actually, I think it’s kind of shocking, but about 60% Some of the dollars that are physically printed, are outside of the US. It’s kind of amazing that it’s actually used internationally a lot. So we didn’t I mean, we could do it, but it would change a lot, particularly when it comes to the dollars kind of supreme spot, that could change a lot. And this is just another fun fact, they can see how many have been printed as far as $1 bills, or $100 bills. And you think, in the total number, you’d have way more $1 bills than $100 Bill is printed, but it’s actually almost two to one, it’s substantially more $100 bills that have been printed than $1 bills. Well, why is that? When we talk about physical printed bills, it’s because in other countries, they actually are using a lot more physical $100 bills, the story if you live in Argentina, or you live in Turkey or whatever, just buy $100 us bills, and it’s going to hold the value a lot better, even though we have the inflation we have it’s much better than the turkey inflation, which I think it was like 70% or something really high. Right. So people are doing that around the world as well.

J Darrin Gross 30:59

That’s interesting that the the paper money and in you know, countries with more inflation is a is a good hedge on their inflation. Yes. That’s kind of interesting. Yeah. So in you said, or the firm that you guys are, are investing with? What’s kind of a minimum for people to get into the fund? What’s the minimum investment are

Bronson Hill 31:24

you still is different the ATM fund, we do it in increments of 52,000. So that’s just, you know, 50 204 156, that’s accredited investors only. We also have our other multifamily or other types of deals you did 75 to 100. And our other deals, but it just depends on the deal

J Darrin Gross 31:42

on it. And on the the multifamily there’s like an exit strategy or some sort of a plan to exit. What about on the ATM fund? Is it basically just to put your money in and you keep getting a monthly return? Or what’s the

Bronson Hill 31:57

Yeah, so it’s a little different in that aspect. It’s it’s a high return. So again, this is not an offer for any investment. But currently, you know, how it has worked is, you know, 100k invested returns around $2,100 a month, every single month for seven years, starting the fourth month. And so it’s so much cash that you, you know, people have generally been getting around half of the money back in just over two years. So then you can reinvest. And then just over four years all the money’s back the line, it’s a seven year investment, the last three years is just cash flow. And then at the end of seven years, it just at the end of 84 months it ceases to pay. So it kind of ends, there’s no big lump sum at the end. And that’s that’s been a challenge for some multifamily investors get their head around, say, Well, hold on, where’s the big lump sum at the end? But because it’s kind of a unique for a time like this, though, where it’s like, well, what, you know, there’s this phrase called Tina, you know, there is no alternatives. If you can’t find a good alternative in the stock market, or in real estate or other things, what are you going to do with your cash for the next couple of years, something like this can be really awesome. And we’ve actually had three investors put around a million dollars each in the fund or more, just because they’re saying I just don’t know where I can find this kind of return and to be able to get on a million dollars around 21,000 a month. That’s a pretty solid return. And of course, every investment has risk everything. You know, there’s always caveats to everything. But I think just finding things that do have unique, you know, and I think this one thing I like most about it is the consistency of the cash flow over 10 years, you know, they haven’t missed a single preferred return payment monthly payment, or haven’t reduced it at all, which has been great doesn’t mean it won’t happen in the future. It just means it’s been super solid to this point.

J Darrin Gross 33:40

Is that return is that a fixed return? Or is it vary based on the usage fees generated?

Bronson Hill 33:49

So it’s considered a preferred return? So it’s 100% preferred return, in the sense that I’m sorry, it’s not 100% it’s, it’s 24.7% prefer return, but basically a 100% of that first 24.7% per year goes to the limited partners and so the operators take kind of the money above that. And so but in general, it it’s like I said it had that has not changed in the over 10 years since the inception of the funding, could it change? Sure. Is it guaranteed? No, it’s not guaranteed. It’s preferred but which is it’s an important distinction, but I really do like investment.

J Darrin Gross 34:25

Yeah, it’s interesting. You know, I was talking with somebody else this morning about just you know, when you understand basically the math of multifamily deals where it’s you know, like NOI and cap rates and and expenses you when you look at other industries and you can kind of see the how the numbers work. You know, just basic business math kind of thing and just to see how a different deals work. That’s interesting, though, on the on the ATM machine. I mean, to have your money’s working for you. That’s the that’s the Big the positive thing there in the Oregon some cash flow. Is there any kind of depreciation or or leverage in that? Or is it basically is the money buying the machines for cash and then putting them to work? Yeah,

Bronson Hill 35:15

so that’s the one advantage, there’s no leverage, there’s no interest rate risk is just going straight into the machines. And, you know, one of the one of the reasons this deal exists is because ATM machines in general, in the finance world, it’s perceived kind of like pawn shops or title loans. It’s just not perceived as a very high class type of investment. Which I mean, I understand, but I think one of the challenges too, is, is also at the cash business. So we’ve seen this as well, regardless what you think, but I have not invested in the cannabis business, which is all over California, I think, probably Oregon and other states as well. But there’s some issues that cannabis businesses have faced where they can’t have money in national banks, they can’t rent at just normal market rates, they gotta pay way more for a place because it’s federally it’s illegal, but statewise, it’s okay. And so it’s kind of a unique thing. And it’s a cash business. So a lot of these large banks, they have these anti money laundering type of policies, that they can’t take the money they can’t invest in, they can’t have certain types of things in these type of ATM deal. So it makes sense, you know, every time you want to ask the question, well, if the return is good, well, what’s the reason this is available in the market? And in that in this case, it’s because the financing options, there’s, it’s harder to get money for this type of investment because of some of the regulations that go around it.

J Darrin Gross 36:36

Now, the whole cannabis businesses, definitely an interesting one with kind of laws and handle the limitations. They create opportunities.

Bronson Hill 36:44

Yeah, exactly. You know, and I think if you’re willing to, if you’re willing to do it, other people aren’t or you just you kind of see it, okay, well, why is this here, what’s happening? And again, I haven’t invested in the cannabis business, I have some good friends that haven’t done very well in it. And I think that’s great. But you know, you gotta you got to do something that you both believe in, you see it, you understand it, you understand what the risks are? And, you know, I just, I understand why, you know, it’s, if somebody’s getting a, you know, a fixed return annuity of, you know, three or 4%, like, okay, that’s one type of return. But, you know, there’s a reason why this is much higher. And, you know, it’s just because a lot of other people don’t want to be in the business, or they don’t want to, or they can’t be in it because of some of the stipulations around it.

J Darrin Gross 37:24

Right. All right. So if you were to give the listeners a tip, or, you know, a reason to do something right now, or how they can best protect themselves against inflation right now, what would you what would you encourage them to do?

Bronson Hill 37:45

Well, I think always the first thing you can do as an investor, and that way, you know, I’ve been able to 20x my net worth in the last four or five years, but it really has come through education and networking. And so education, you know, reading books, read about 80 books a year, going to conferences, going to networking events, meeting people, because, you know, there’s a saying, and it says that you I think it’s John Wooden, you’ll be the same five years from now, except for the books you read, and the people that you meet, as he’s basically saying, you know, the, how you educate yourself, and how you network, there’s investments that are out there that, you know, if you don’t even ever learn about them, then they just, they’re just things you don’t know about. And so I think the biggest investment you can really make is in your own education. So I would say, you know, if you’re a passive investor, start going to a meet up in town, start listening to great podcasts like this one, start reading books, start, you know, meeting other people, particularly other passive investors, I think when you meet other people that don’t have anything to sell you, they’re just out there trying to do what you’re doing and trying to make money. We really kind of dedicated our show the mailbox, money show or YouTube channel, I’m actually writing a book now about passive investing, just to you know, passive investors just like these doctors I work with, but you really become a slave to their jobs, right? Even though they’re making great money if they’re, even if they’re saving money, if they don’t know how to put it to work to have the money work for them, then, you know, we still become a slave of a job, we still are not financially free. And when you can replace your living expenses, called your rat race number, right? You know, you can get out of the rat race, because now you’ve covered your living expenses. And you’re free, you can choose how you want to work or if you want to work or what your work is supposed to look like. So I think it all starts with education. And it all starts with really trying to learn more, meeting people figuring out what they’re doing, and just you know, taking action.

J Darrin Gross 39:32

I love it. Hey, Bronson, if we could, I’d like to shift gears here for a second by damn an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies that we typically consider. We first look to see if there’s a way we can avoid the risk. And when that’s not an option, then we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation, could be your clients, investors, the Fed, political environment, whatever, however you would like to compare and contrast or answer the question, what is the biggest risk? And, again, for clarification, while I am an insurance broker, I am not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Bronson Hill, what is the Biggest Risk?

Bronson Hill 40:45

So I think there’s a lot of risks. And I think, you know, sometimes we see risks, and we don’t, you know, we tend to have inactions. I think inaction is probably the biggest risk for that I see, for most people, I’ve had now close to 1500 conversations with individual investors. And I just see analysis paralysis is real, we get busy, we have stuff going on, we don’t take action. And all sudden, we’re like, well, where’s, you know, gosh, I really wish I missed out on this, I missed out on that. And it’s not that we have to take massive action and you know, go from 0% invested in alternative deals to all of a sudden 100% invested. It’s just, you know, taking small steps and saying, you know, one of my things that I tell people is, you know, against analysis paralysis is, you know, go to meetups, give yourself a timeframe. Okay, in the next two months, I’m gonna go to this many meetups, I’m gonna, you know, get on deal sponsor list, we have our own deals that we do, we have people connect, and Ben wants to reach out and get on our list and hear about our deals, they can do that at Bronson equity. And, you know, what happens is as you do that, then you give yourself a time frame, you analyze, you know, five to 10 deals, and you say, Okay, I’ve give myself 60 days, and I’m going to invest in one or two deals, and you just do it, and you say, Okay, I’m gonna do this, and I’m gonna choose, and it’s probably gonna go just fine. And the big thing we have to get over is the fear of making a mistake, or that we’re gonna do it perfectly. And perfection really is a myth. Like, there’s no way you know, it’s all about learning. And so why don’t we learn even when we don’t do things perfectly. And so I think really, the biggest risk that I see is just inaction is just not actually taking the steps for eight years, or six or eight years, I went to meetups and didn’t do anything. I mean, I had about one rental, but it didn’t do any action. And it wasn’t until I was I actually made the decision that I’m actually going to change my life. And there was a point I remember where I had said, you know, I’m in my job, and I want to leave my job in three years. And I just made that decision is going to do it. And Tony Robbins says this quote, he says, it’s in your moments of decision that your destiny is shaped, in your moments of decision that your destiny is shaped. And so in that moment, my my, my destiny started to shift. And I began, I was able to do it in three years, I was able to leave my full time great 200k Your job, because I had made a decision that I was going to really just do whatever it took, and I was the I was working hard. I was hustling, but I knew it was a season. And I think for a lot of people and it doesn’t mean you had to do it the way I did it where you had to be fully active and raising big money and all the all the stuff but there’s a lot of people that make a lot of money. And there’s a money problem. And it’s not that I don’t have money, it’s that I have money, I don’t know what to do with it. Right? So that’s a problem. So you know, there’s gotta there’s ways you can educate yourself and really find ways to take action. So I think that’s the biggest risk is inaction.

J Darrin Gross 43:12

Now let’s call it’s well said and definitely have been guilty of inaction, you know, the analysis paralysis before and and it’s easy, it’s comfortable to stay in the analysis, as opposed to the uncomfortable action. Bronson, where can listeners go? If they would like to learn more connect with you?

Bronson Hill 43:33

Yeah, so my websites the best spot Bronson equity.com. I’ve got a free my free ebook How to Use Inflation to Your Advantage is about it’s about 50 pages. It’s got several other strategies that I did not mention on this show. But that’s a great way to connect. We also have our investor club where people can hear about our awesome deals, we’ve got some stuff in the pipeline that we’re working on that’s alternative outside of real estate as well as some of the real estate stuff we’re working on. And then I’m also on social media, a lot of channels have a YouTube channel and, and all that so but I appreciate you having me on Darrin, this has been a lot of fun.

J Darrin Gross 44:04

Yeah, I appreciate it as well. Bronson I cannot say thank you enough for taking the time to talk. I have enjoyed it. Learned a lot and I look forward to doing it again soon.

Bronson Hill 44:15

Awesome. Thanks. Thanks for having me.

J Darrin Gross 44:18

For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.

Announcer 44:36

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Passive Investor Mistakes to Avoid with Stewart Heath – CRE PN #410

Stewart Heath 0:00

I think most passive investors probably don’t pay enough attention to the timing the intended timing the state and timing of the investment on the front end. And And likewise, it’s not necessarily the investments fault but they’re not paying enough attention to the their own cash needs and seeing if it’s an appropriate investment for them. So it’s not something that they should be that they should go in lightly. I’ve had investors that I’ve done now yeah, you know, you hear how I’ll send you money and it always make sure you understand what what you’re buying and like both of these guys are very, very sophisticated, but I think a lot of them don’t do a proper planning on the personal side.

Announcer 0:55

J Darrin Gross 1:14

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals to provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate campaigns to work with the real estate of real estate investor protection specialist to protect yourself and your investment in catastrophic loss. The experts had Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to BuildingInsuranceRisk.com.

Today, my guest is Stuart Heath. Stuart is the founder and CEO of Harvard Grace Capital, a private equity real estate investment firm that helps people build wealth faster through hands off real estate investing, generates passive income, reduces risk and maximizes tax efficiencies. And just a minute, we’re going to speak with Stuart a bout the hidden mistakes to avoid and key criteria to look for when evaluating potential passive property investing opportunities.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find this on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe.

With that, I want to welcome my guest, Stewart Heath, welcome to CRE PN Radio.

Stewart Heath 3:17

Thank you so much for having me. It’s a real honor. Appreciate it.

J Darrin Gross 3:20

Well, I’m looking forward to our conversation. But before we get started, if you could take just a minute to share with the listeners a little bit about your background.

Stewart Heath 3:29

Sure. I have lived my entire life in Tennessee, Alabama area. I am a Certified Public Accountant graduated from Auburn University a long, long time ago. And I still practice as a CPA, but my main focus is on sponsoring cash flowing real estate investments and syndicating those to investors. Where that fits their portfolio needs.

J Darrin Gross 3:59

Got it? And so you’re based in Tennessee, right? I am. Yeah. And is that primarily the the area that you invest in? Or Or do you get further out or

Stewart Heath 4:10

it is primarily the area that we invest in. It actually it’s a little bit more narrow than that. Generally the area we invest in is called the Tennessee Valley. More specifically and sort of almost as a marketing gimmick, we say we invest in the 845 65 corridor, and that refers to two interstate connectors. One of them 840, a south of Nashville and 565 runs through Northern Alabama, which includes Huntsville. And so we’d like to invest in between those two interstates in in some suburb towns, even some smaller towns that are impacted, but the real heartbeat of that geographic area is not so much Nashville as you might think. A which obviously is a big regional influence but Huntsville Alabama is growing and growing and growing. And is just it’s just creating lots and lots of real estate opportunity. And I like to tell investors that it reminds me of Nashville about 30 years ago. And I don’t want to really miss the Mr. Train this time.

J Darrin Gross 5:22

Yeah, like, you know, I I’ve heard about Huntsville, I think, mostly and correct me if I’m wrong, is it not like a NASA base there is air. I mean, I

Stewart Heath 5:32

It was, you know, most people in this space NASA is is based in in Florida and in Houston. But a great deal of the research and development for NASA since its beginning, it has been in Huntsville. It’s been quiet. It’s been a it’s been a real defense contracting research hubs. So awful lot of rocket scientists living there who really can’t talk about what they do for a living and, but that all changed in 2008 when the congressional Base Realignment commission, relocated three army commands to the Redstone Arsenal, which is the army facility in the middle of Huntsville. And in that Bronx, a bunch of new generals and all the commands that come with that, there was also a new big push in defense spending. That if you’re a defense contractor, you’ve probably had facilities in Huntsville for a long time, but, but now they’re increasing their staff as they come out of California or out of other parts of the country, they increase staff there. And simultaneously with the big government push, there’s been a private industry push. Toyota, who already had a plant there, has built a brand new joint venture manufacturing facility with Mazda to build some engines. And they’ve hired they came in saying they’re gonna hire 3000 People now they’re up to 6000. So Facebook has a big data center here, which employ employs several people, but it just keeps going and going and going. There’s a lot of a lot of affordable land, a lot of good workforce available there. So we’ve seen this big manufacturing push and, and all of that creates needs for housing and other commercial real estate needs.

J Darrin Gross 7:32

Now, that’s great. And what is the size of the MSA there for them? The I guess, the Huntsville and then I guess I just ask is the Tennessee Valley? Is it all populated throughout? Or is it is it kind of like two ends? Or how I’m not looking at a map?

Stewart Heath 7:50

Yeah. So Huntsville is sort of at this dip in the Tennessee River. And it continues to flow towards the Mississippi obviously. And so you’ve got Huntsville, which is the big, influential city. It’s now the largest city in the state of Alabama. There’s a little bit of semantics. The Huntsville MSA is not larger than Birmingham’s MSA, but city limits to city limits. Huntsville is larger. But the Huntsville MSA also includes Athens and Decatur. And the MSA actually includes several southern Middle Tennessee towns as you cross the border where I live in Fayetteville, Tennessee, you know, we’re in the Huntsville MSA I’m a lot closer to Huntsville than I am Nashville. So there’s about 450,000 in that Huntsville MSA in that might just be the Northern Alabama population don’t include perhaps another 75 or 100,000 in that middle Tennessee area, where you pick up favorable Pulaski when towns like Winchester all all of whom also have some sort of a distant defense contracting employment base in these little towns to

J Darrin Gross 9:18

Yeah, well, I mean, you’ve mentioned one of the favorite employers of real estate investors as government from a standpoint of, you know, stable workforce and, and, you know, it’s not like the the government’s gonna go out of business. So that’s that’s a good thing there. We don’t think so. Anyway, yeah. Fingers crossed on that, I guess. Knock on wood. So, what, are there any specific asset classes that you focus on?

Stewart Heath 9:51

Yeah, we’re a little different, because we do focus on a geographic area that we know so well. I’ve been here my entire Life. So we’ve not really limited ourselves to one particular asset class. I think that’s an appropriate philosophy, if you’re expanding geographic area, because apartments are pretty much gonna run and operate the same and have the same similar issues, whether you’re in Kansas City or if you’re in LA. But because we focus geographically we have and we invest in all types of commercial real estate. Save one, we don’t do we’re not we haven’t really bought into the big built for rent communities, single family homes, I have a worry about that building a bubble in that particular asset class that will probably start showing up maybe five to eight years from now, as in my worry, is that the that the institutional buyers who go in and build 500 homes, they’re gonna they’re just gonna all sudden dump them on the market in about 10 years. And, and I think it could have a damaging impact on that. I might be wrong, they might not do that. But yeah, I suspect somewhere around the 10 year mark, which is where most brand new homes start to have things like water heaters and HVAC units and stuff like that. I think once the maintenance really kicks into that asset class that there will be a wholesale dumping of those assets on the market. And that might impact pricing, it might not they might be willing buyers ready to gobble them up and turn it back over for rent. But so we’ve we’ve done storage, self storage, we’ve not done industrial yet. Haven’t found industrial deal that I like. We’ve also not done a multifamily yet because we are cashflow buyers. We are not fixers and flippers. And every multifamily deal that I’ve found that has already been renovated and is stabilized, I think is way too expensive. So we have not bought it because it’s if you gotta wait a couple of years for the cash flow to to kick in. That’s that’s not a deal for us. We’ve done some office, we’re doing another. When I say office, I’m talking about suburban office, which a lot of people classify as retail. I’m sitting in one of our assets here in Spring Hill, where, you know, our tenants are doctors, dentists, mortgage companies, things, things that are consumer facing. But they can’t really be done remotely, that you can’t remote your dentist, you can’t remote your doctor, he’s not coming to see you. And in mortgage companies, by law have to have a physical office, even if people are working from home, they have to have an office. So there’s lots of uses like that in the office realm that is slightly different than glass for at retail. So and we’re we’re under contract on another one in Huntsville, very similar to that. Right in the heart act. Technically, it’s in Madison, Alabama, which is an upscale community that is surrounded by Huntsville.

J Darrin Gross 13:27

Gotcha. I was gonna ask you, i Hey, if I’m if I’m correct, I believe that Tennessee has no state income taxes. And that is correct. Yes. And how does that compare to Alabama? And does it? You know, is there an attraction to to Tennessee over Alabama, based on that, or is it not been an issue?

Stewart Heath 13:50

It’s good question. I have made some money in past opportunities at state line arbitrage. But state income tax is not one of those that you that you can do because if you live in Tennessee and work in Alabama, you’re still subject to that state income tax. There are some things where you can do some retail on the Tennessee side, if you live in Alabama, and so there’s some opportunities like that. For instance, Tennessee has a lottery. Alabama does not. And there’s a particular property owner I’m aware of at the state line on one of the major highways coming out of Huntsville. That’s the largest seller of lottery tickets in the entire state of Tennessee, because it’s 15 minutes away from a massive population of people that don’t have a lottery and it’s quite the spectacle. So Alabama is seen as very, very, very business friendly. They do have an individual and a business tax. They are not very onerous. There are lots of exemptions from them. It’s in there otherwise, we’ll tax and property taxes are generally low. So all in taxes, you know, total to total, Tennessee and Alabama might be fairly comparable. With Tennessee getting the edge with probably Texas and Florida being the leaders in sort of the State Taxation game, as they have been for a long time.

J Darrin Gross 15:30

On in I want to say that i i read or saw something here recently talking about three of the top fastest growing states mentioned Florida and Texas. But does Tennessee not like number three? I think I’d heard that.

Stewart Heath 15:47

Depending on how you look at Tennessee’s either in the top 10, or the top five. So I heard our governor at the State of the State Address claim that you know, we were I think number three or four, because I hadn’t seen us that high yet. But I mean, Tennessee has been sort of quiet and but but growing very, very, very friendly business day. And, you know, we just over my shoulder, General Motors built the Saturn plant back in 1987 or 1988. While they don’t have Saturn anymore, they still build several Chevrolet vehicles there. And that is the campus of the site where they’re building their new Evie assembly plant. And their evey battery plant, which is going to bring lots and lots of jobs here to Spring Hill, as this Spring Hill wasn’t thriving already. I mean, it’s Tennessee, it’s a good state. They don’t they don’t go crazy. Too far, one way or the other, we just I think they just put out reasonable policies. So one of the reasons we like the areas we like these suburban, rural areas.

J Darrin Gross 17:05

Yeah, I was talking with somebody else from yesterday, I think it was from Texas, and he was telling me about a slogan they have it was something about like, Welcome to Texas, please leave here. Your values, you know, where he came from? Or they’re afraid. What was good was gonna change based on the be in migration from all of the blue states or whatever they you know,

Stewart Heath 17:27

We have, you know, we have some of that going on here. We have a lot of people coming in and from the western states, in some in Yeah. Yeah. I’m glad you like it here. And you’re welcome. But there’s a reason you like it here.

J Darrin Gross 17:45

All right.

Stewart Heath 17:49

We also like to remind all the people from Texas that there wouldn’t be a Texas if there wouldn’t be Tennessee. So going back to the to the early 1800s When Tennessee Volunteers, which is why we’re the Volunteer State, they just picked up and went to Texas to fight Mexico, you know, even before they were a state.

J Darrin Gross 18:11

Yeah, and I forgot that little bit of American history there. But that’s, it does have a rich history there. I probably because Daniel Boone was he was gonna be down there and all that, but that’s great. So, talked a little bit about asset classes. And I wanted to ask you a little bit about passive versus active investing. When you work with people, you focus mostly on on helping them and in a passive way so they can invest with you or do you also work with people to do some active investing, it sounds like you are clearly actively investing. But tell me a little bit about how you work with

Stewart Heath 18:59

Well, coming from a CPA Breton background, I meet people where they are, I had a meeting with a group of investors who wanted to have me put together a you know, basically a private deal just for them on a storage deal that they their restaurant tours, and they’re very, very successful in their restaurant business, and they want to expand in storage. And, you know, I was introduced to them as somebody who’s operating storage in so that would not be a syndication deal on our part, but they’re very sophisticated business people and and want to put some money to work in storage. And so that would be me meeting them. And, and I would they would be active investors at that standpoint. And I would be a partner with them. But for the most part, I am working with investors on a passive basis Not just by good common sense, but by law, we need to get to know these investors a little bit to be able to understand their needs in our last raise last fall, you know, there were a couple of investors that we just had to say, I don’t think you’re a good fit for us. Yeah, they said they were accredited, sort of doubted it. And you and it’s possible for people to meet the definition of an accredited investor and really not know what they’re doing. And, you know, so we like for everybody to have a good understanding of the business. Nobody has to, you know, it’s totally passive. Once you’re an investor, you don’t have to make any decisions or guarantee any debt or show up and clean any toilets or anything like that. All of that is handled, but we do like for you to understand the economics of the transaction and the risks involved. So we have good conversations, most of our investors will admit, to date all of our investors have reinvested with us latter deals, and we always pick up additional investors along the way, as well. So we’ve got 100% reinvestment rate, which I’m pretty proud of. in all truth, that’s some pretty small numbers. But it’s still a good thing to say. But but we make sure we get to know what their achievements are, and that, you know, the the investment will be illiquid for a period of time, even though we will start throwing off cash flow in the very first quarter after the deal, because that the deal will cash flow from day one, because all we do is stabilize properties.

J Darrin Gross 21:51

So when you say stabilized properties, are you are you not looking for ways to improve it? Or is it more about just it’s all it’s it’s a turnkey thing and you you’re able to get it at a price where you’re able to generate cash flow?

Stewart Heath 22:07

Well, the ladder is key, we do get it at a price where we can generate cash flow. But yes, we’re always looking at ways to improve because tenants needs change it like this, this office building that I’m in right now. My dentist wants to expand, somebody else wanted to reduce. I had some storage space that was just used, it was just extra space on one piece that the previous seller had used to keep a boat in. And so you know, it’s it’s almost like the game where you got to move things around. So I got a small tenant to go up to that space, we built that up for him. And, and he’s happy as a lark in his own little space up there. And it and so that space that was never previously rented. So I have a new income generating space there, the dentist is happy because he got to expand and my other tenant is is happy because he got to reduce and actually in between the dentist and the other guy. I created a whole nother space. That’s that’s already been leased. So yes. And in the whole process, I was able to move everybody up to new longer leases at market rates. So yes, there is always room to improve because a piece of commercial real estate is is a living, living, breathing thing because tenants are living breathing people and their needs change. I mean, my dentist is 70 years old and has a 10 year plan. I just, you know, he’s an amazing Dynamo. But and you know, he’ll, he’ll sell that practice to somebody, but he wants to lock in that piece before he does that. So, yes, there are always opportunities to improve and so we’re getting a real step up and we’re we’re going to beat our pro forma on this building in the beginning later this year once all those new grants kick in and we spent some money to do that. But we were able to do that without any capital calls between reserves we had and the bank who’s very happy with us it will pay all that off over the next three four years.

J Darrin Gross 24:32

Got more cash flow. What’s uh, you mentioned that the investors you’ve got have reinvested with you. What’s an average hold time for you on your your investment.

Stewart Heath 24:45

Our average hold time is going to be about five years. But because we are cashflow investors and this is a little bit counterintuitive to a lot of professional real estate investors getting you need to understand the industry of people like myself, you know, we make money when you’re buying or selling, so you know, there’s fees involved in profits and stuff. And, and that’s great. And I think that’s correct for a lot of, but I’m also trying to build a recurring cash flow stream for myself, because I invest with the investors. But we always tell them, it’s a, it’s an average five years. But actually, I try to talk them into holding, because you can refinance the property as it goes up in value. And you can take advantage of advantageous rates, you pull the cash out, you give the money back to the investors, which might get them you know, made 100% Home Plus a preferred return, and then the and then they stay in and just keep getting the cash flow, it might be a little bit reduced cash flow, because now you got a higher note, but the property continues to grow. And then they’ve got more money to go invest in another deal with you. And so you start stacking your cash flow opportunities, and you pull that money out the first one that’s, that’s tax free, because that’s just borrowed money. And capitalism, there was no, there was no income event for that. And ultimately lent one day you’re going to sell the property. But commercial real estate has a long, long life to it. And as long as you’re taking care of it along the way, you’re going to extend that life much like having the maintenance plan on your HVAC, you haven’t come out and do the maintenance. And guess what you can get a lot longer life out of HVAC unit than you would by just waiting to fix parts when they break.

J Darrin Gross 26:47

Yeah, no, that’s definitely you’re gonna pay one way or another. And then it’s usually a lot less expensive to pay, pay as you go and maintain it. Plus, I find the newer appliances, whatever, whatever you’re buying, they’re built to go just past the warranty. So someone was working, hang on to a

Stewart Heath 27:08

I’ve got a 1974 refrigerator that’s that was left in the house that we that we live in. And that thing is still running. It’s the coldest it makes the best ice. I mean, it’s I hope it’s never going to kind of quit.

J Darrin Gross 27:24

Yeah, I don’t even like tempt fate talking about some of them. Because it’s I mean, I just, you know, like, you know, not because someone they just they, they were built to last? I mean, there was no there was no you know, they weren’t building them just to to go pass a warranty back in the day. They didn’t understand that that. What’s that? There’s a phrase for it. It’s some

Stewart Heath 27:48

Planned obsolescence.

J Darrin Gross 27:50

There you go. Yeah, I don’t think they they did not understand that in the day, that was not a not a

Stewart Heath 27:56

marketing team wasn’t running the company yet. You know, the manufacturer,

J Darrin Gross 27:59

Right, right it was all about your, your good name and how you’re a quality and how it last. But anyway. So let’s talk a little bit about some of the mistakes, some of the hidden mistakes that you see investors make, and potentially ones that you’ve made, that you didn’t recognize until they were made. Tell me and tell me a little bit about some of the mistakes you’ve seen.

Stewart Heath 28:35

I think most passive investors probably don’t pay enough attention to the timing, the intended timing, the state and timing of the investment on the front end. And And likewise, it’s not necessarily the investments fault, but they’re not paying enough attention to the their own cash needs. And seeing if it’s an appropriate investment for them. So it’s not something that they should be that they should go in lightly. I’ve had investors that I’ve done Oh, yeah, yeah. You know, you hear how I’ll send you money. And it always make sure you understand what what you’re buying and like, both of these guys are very, very sophisticated. But I think a lot of them don’t do a proper planning on the personal said, because generally on your real estate investment, your money’s going to get locked up for about five years. Whether or not it’s it’s an income generating thing we like. We like cash flows, and so we pay out income but that’s not paying back to your original $100,000 that you perhaps put in mistakes that I’ve made on underwriting early on is Failing to realize that GE when you buy the property, the local taxing authorities are going to reset the value of the property. And your new your new property taxes are not what the seller was paying, it’s going to be based on the purchase price. And so yeah, I did that in my first deal. And I still kick myself for it, because I’m a CPA, I knew better. Even in some of these districts that don’t raise property taxes very often, yeah, they aren’t going to do it when the property sells. I mean, that’s just, that’s just low hanging fruit for them, and it’s appropriate. And you got to plan on that. Likewise, your insurance, you’re not going to keep a similar insurance premium. From what your seller was paying. Sense, I’ve come across many sellers who were just being kind of dumb what they were insuring anyway. But your insurance is going to be based on the price you just paid is, you know, as a replacement value and, and things of that nature. So you’ve got to get to take those simple things into account. Whether or not you think it’s likely, like to date, every deal we’ve done has been a 100% full property. You still have to underwrite for the possibility of vacancies, that you can start that after leases expired, but you shouldn’t just assume 100% That all leases will renew. I had one just last month, who had been telling me their lease renewed February 1. They’ve been telling me for six months. Yeah, I’m going to renew I’m going to renew and I was being slow at sending them the lease. But we haggled out the price, we had all the details worked out before Thanksgiving, then they informed me on January 15, they were not going to renew. I never liked that tenant anyway. Because you know, that wasn’t the first time they hadn’t they had been untruthful with me, but so yeah, we had exactly 17 days of vacancy, because I was able to turn that unit around and rent it that quickly. And but it could have been it could have been 90 days could have been six months. Commercial doesn’t turn that fast. We’re just blessed to be in a very vibrant area. And in that it was there was a need in the first part of the year. There’s a lot of people looking for new office space. It was good timing on our part.

J Darrin Gross 32:52

Yeah, 17 days on a vacancy, I’d say sign me up. Yeah. And I’m curious on on a commercial turn. Was there any significant work he had to do?

Stewart Heath 33:08

No, no, we went in, and we had renovated that space for that tenant in 2019. They were very gentle on it. So we went in and touched up some wallpaper and gave it a nice cleaning. And that was about all there was to it. So we were fortunate in that realm was that you see that a lot in, in commercial, unless they’re just packing people into their office. And it’s not like when I was managing residential properties where even the good tenants would do so much. I mean, you were repainting the whole unit every two years and replacing flooring and stuff like that. The commercial with a lot less wear and tear.

J Darrin Gross 34:00

Yeah, no, I have come to appreciate words, it’s two sides of the same coin, I guess, you know, you have one, at least in the residential, which is mostly where I play as you know, if you keep pushing around, there is going to be turnover. And the good news if it’s, if it’s, you know, only a couple of years, they probably haven’t beat the place up too bad. If you have somebody staying as long time that’s a good thing because you’re not having turnover but usually when they do leave, it’s like an encampment and there’s usually some you know, quite a bit of stuff that was left that isn’t yours that you’ve got to you know take care of and basically helpful rehab on a you know, mostly like a single family property or something like that. So I that the commercials appealing just from you know, I’ve kind of come to learn this even about talking to some people about like these Airbnb models about how, you know, people they come and they they’re basically just, they’re they’re in there they’re kind of on their best behavior they’re not, you know, it’s not a kind of where now you’re gonna have dogs running around and kids and peanut butter and jelly and you know, whatever crayons on the walls and that kind of stuff, it’s more kind of come get to work down the professional kind of turn the lights off go home, kind of thing. So

Stewart Heath 35:20

That’s, that’s why I have gravitated to commercial. I’ve done residential, personally, I’ve done it professionally. In because at Harvard grace, we manage all of our own properties, which I’m actively involved in, we do that because it’s probably a whole nother show. But we think the model for property management, third party property is kind of broken. So we do that ourselves to ensure that we can deliver the pro forma that we sell to investors. But I don’t like dealing with with residents. They’re not business minded people. You know, it’s, it’s not personal, you know, when you go to collect rent from somebody who’s behind it, it’s at their apartment, it’s very personal. And they get emotional and and even though you can be behaved, you can, you can do it well, and you can treat people right. At the end of the day, you know, they gotta pay or get out. It’s the, to me the laws are actually more in favor of commercial landlords in the our residential landlords. And anyway, it’s just call it a lifestyle thing. I like dealing with professional people. Self Storage is sort of the same way. People don’t live that well. They’re not supposed to live there. But but, you know, the laws are such a hey, hey, are unlocking Yeah, you know, and it’s, it’s very straightforward. A dude, it ain’t personal. You know, but it’s, it’s it’s pay to stay. You know, it’s that kind of stuff. And I wish residential could be more like that. But, you know, when you’re dealing with people’s residences, you know, the laws are probably correctly in favor of the tenant. Primarily, because for 1000s of years, there have been bad landlords. So in mistreating people.

J Darrin Gross 37:28

Yeah, no, I think the most of the laws that we have came from, like you said, a need. There was some abuse somewhere that that occurred. And, and, you know, unfortunately, a lot of times, it’s it’s the rare exception that is that. But then the law basically says, Greg, don’t tolerate that anymore. And, you know, for the most, most people that were operating all along, you know, within the realm of reasonable, it’s not really a big deal for him. But still, like I said, there, there’s definitely a longer list of laws that affect residential tenants, and landlords, as opposed to the commercial leases are so Hey, Stuart, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk, when that’s not an option with a to see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, then we look to see if there’s way we can transfer the risk. And that’s what an insurance policy is at risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation, could be the market interest rates, political your, your tenants investors, however, you would like to frame the question and identify what you consider to be the biggest risk. And, again, for clarification, while I am an insurance broker, I am not necessarily looking for a an insurance related answer. And so if you’re willing, I’d like to ask you, Stewart Heath, what is the Biggest Risk?

Stewart Heath 39:32

I am willing, and I will dive into the pool. I think it’s a brilliant question. To me, the biggest risk is tenant selection. It’s not an insurable risk. You know, I do live in Tornado Alley. So you know, severe weather can be a risk but you can insure around that the biggest risk is essentially the income from the property. And the income from the property comes from tenants. And it is a professional, I think it’s a professional expertise that is developed to be able to underwrite a new tenant for a lease. It’s not just the first person that called and say, and is willing to pay you the deposit. And I use that example, because I’ve made that mistake before. But if you will take, you know, an hour’s worth of due diligence, either residentially or even commercially, and check into them yet third party reports, and do reasonable and customary means of verifying what what the tenant is telling you. And yet, then, then you will most of the time, select a proper tenant. If you don’t do that homework, your property will have income problems. And so what is a bad tenant? Well, number one is bad tenant that doesn’t pay. That’s one. But part and parcel with that is people who don’t pay usually bring other kinds of people to your property, whether it be multifamily, whether it be to your commercial office, your storage space, whatever, I have seen this over and over and over again, which actually begins to make other tenants feel uncomfortable. And so now your problem is a lot worse than just the one guy who’s not paying. And it was also easily headed off. By doing some basic due diligence on the front end, that’s the biggest risk I have in what we do. There are obviously other kinds of risks slip and fall risks, and we get sued by somebody whose coffee was too hot or whatnot. And, again, that’s insurable risk, we carry general liability as well as property coverage and, and on most of our properties. Like, we also get business interruption insurance, or, like, if a tornado takes out a lot of our storage buildings will, you know, we’re, we’re not only going to get repaid to have that rebuilt, but we will get income that we’re missing from those units that were that the tenants can’t use. So, but the biggest risk is the one that’s not insurable. And that, to me comes down to tenant selection.

J Darrin Gross 42:49

That is so appropriate for myself, and I’m sure all the listeners to know that, you know, selecting the tenant, and I know on commercial, it’s, it’s a lot more of a, I mean, you have the ability to to credit check and check, credit check, but just to really establish, you know, how credit worthy they are. But, in fact, if I understand, right, I mean, a lot of the commercial real estate is basically valued on the you know, the strength of your, your tenants, you know, if you’ve got, you got a bunch of people that have only been there for a little while, and they bear and they rarely pay or, you know, they don’t have a whole lot of credit, that’s probably a tougher sell than if you got, you know, name brands or established businesses with with significant credit history to do so.

Stewart Heath 43:41

Just in this building, I have a public company tenant. In your they’re always fun to negotiate leases with because they never want to pay a security deposit. And this will look at us, you know, anyway, we usually arm wrestle over that, but I’ve got everything from the public company to the single CPA, who is a great guy has been a great Senate, but there’s no backup there. So that’s essentially at least to a person in that situation. Great tenant, look glad they’re here. But, you know, it’s not exactly triple A credit. Like, you know, in some commercial properties, where you have a great big company that leases an entire building, well now that building is valued entirely on the credit in the terms of that lease. So you’re right.

J Darrin Gross 44:42

This is this is good stuff, and I appreciate you sharing with us the kind of mistakes and you know, what your experience has been and and how we can avoid historic where can the listeners go if they’d like to learn more or connect with you?

Stewart Heath 44:59

The best place to get information on me and connect with us is Harvard Grace Capital.com. You can find my Calendly link there. If you’d like to book some time with me, you can look at our resources there. We have lots of resources available for free, you can join our mailing list there and just follow what we’re doing. And I always say, I, I encourage people to use my Calendly link. I do love talking with people about real estate. Whether you have ever invest with me or not, or you just want to call me stupid. That’s okay. I still enjoy talking to you.

J Darrin Gross 45:33

That’s great. Well, Stuart, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot. And I look forward to doing it again soon.

Stewart Heath 45:44

Thank you so much. I appreciate you having me.

J Darrin Gross 45:48

Announcer 46:07

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2023 Multifamily Deals and Cap Rates with Victor Bell – CRE PN #409

Victor Bell 0:00

It feels like a standoff right now. So sellers aren’t really dropping their prices and buyers aren’t really raising their offers. So I think there’s a middle ground of that’s going to change. You know, I think we have probably about a 12 to 18 month window, opportunity that something is going to shake out somebody, like I said, you know, if you have a bigger group, you know, you have some of the larger apartment building groups that own stuff and or, you know, the Blackstone’s and KKR is and things like that, that do have assets that they’ve held on to that have a horizon so they promised their investors above them five years we’re going to turn them burn this thing out and you know, they have to sell those are going to be the deals but to my point, if you’re a smaller person, you’re like I got money in an IRA I’m accredited but you know, I have a business to run and I don’t have time to learn this game. You’re you know, those are the deals that you will miss because you can’t grab those deals by themselves.

Announcer 0:51

J Darrin Gross 1:10

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to BuildingInsuranceRisk.com.

Today, my guest is Victor Bell, Victor is transacted over $59 million in real estate transactions in seven states, including Hawaii, Arizona, Texas, North Carolina, Ohio, and Michigan. And in just a minute, we’re going to speak with Victor about how to succeed in real estate in 2023.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Victor Bell. Welcome to CRE PN Radio.

Victor Bell 3:01

Hey, thanks so much for having me today. I really appreciate it.

J Darrin Gross 3:05

I’m looking forward to our conversation today. But before we get started, if you could take just a minute and share with listeners a little bit about your background. Sure,

Victor Bell 3:15

sure, definitely. Um, you know, I got started in real estate in the late mid to late 90s. I like to tell people, I didn’t really know exactly what I was doing. I left home pretty young, got kicked out of high school, went back to high school joined the military left there. dropped out of college that first semester, when they said if I came back, I was going to owe them money off of the Free Army money and then, you know, got in trouble was on probation, I had to get a job. And then I while at that job, though, you know, I started recognizing that people who had been there for a really long time hated their job. And the people who are new like me also hated working there. Not that it was a bad job, but it was just the trap. Right? It’s the nine to five trap which a lot of people you know, have, you know, that experience. So I was driving home one night I worked nights fell asleep while I was driving and ended up on the side of the road. And I was like, okay, there has to be more to you know what’s going on than this. So I know next day I drove into Austin, I was in Killeen, Texas, I drove in Austin, got a book from the store. And that first year I did 1,000,002 and real estate deals. I didn’t know what I was doing, you know, so it wasn’t like I was brilliant. You know, but you know, I knew that that was the route that I was going to take from then on. You know, I’ve had a few sparse jobs. I had to kind of keep things going during that timeframe, but primarily, I’ve done real estate full time the whole time. You know, so that’s the background on me. And again, I got started from a book, I hurt my way through it. I met a lot of good people who pointed me in the right direction, you know, so so that’s my background. That’s how I’ve done this over the years. But I’m a regular guy like everyone else, you know, pushing through the experience of Investing.

J Darrin Gross 5:00

I love it. I got to ask you what was the book,

Victor Bell 5:05

I was actually fast cash with real estate by Rama grant, that was the first book. And again, it’s a dated book from the 90s. But I literally, you know, I’m a guy that if you told me what to do, I’ll just go do it. So I just as is that book, meaning the book says, do this, I do that. So I pretty much cold called numbers out of the phonebook, reading the script that was exactly in that book. And I ended up getting a deal. And then the book said, also cold call mortgage companies and lenders and things like that and find money. I didn’t know what that meant. But I was cold calling out of the phonebook. And I eventually got somebody, Bob and Jamie, they owned a mortgage company at the time. And to be to even take my phone call. They’re like, How’d you even get this number? I was like, I, you know, I’ve been cold calling, like the book says, you know, they invited me into the office, and they’re like, Hey, let me let me you don’t even know what you’re doing. Let me show you. So they kind of walked me through, you know, finance and how to get certain things done, baby actually became my first partner. And actually Jamie’s my Investor Relations Manager in our real estate fund. So just around who worked out that way. But, uh, yeah, but that’s that was how it started. And it’s crazy, because it’s been a wild ride, you know, and at the time, real estate cycles, market cycles, all that stuff. I didn’t know, you know, something bad was happening. I just thought it was happening to me personally. Now, now, looking back, I was like, oh, that’s that was happened, everybody. But um, but you know, but that’s the start.

J Darrin Gross 6:30

I love it. I love it. So where are you? As far as the start? Was it primarily calling on distressed? Single family stuff? Was that kind of the focus? Or what was that?

Victor Bell 6:41

Well, what happened was the number in the phone book now they were I mean, the number in the in on the property, it was a single family house in the newspaper. And then, you know, I was talking to Bob, he’s like, Hey, call them back, find out if they have more properties that they’re interested in selling. So I did because they were like, Yeah, we’re interested in selling come down to the Exxon, we, you know, they owned a bunch of stuff. I didn’t know that. And turns out, they’re like, Yeah, we have more properties. How much can you how much can you handle? And that’s how I got that portfolio deal. So ironically, though, in that portfolio of properties that we got, they were the rest of those deals, were all multifamily. They’re duplexes, triplexes fourplexes. It was like a 16 unit, a 12. You know, the one house that was in there and be honest with you, which, you know, forged. My investment thesis for the future was like, we don’t do fixer uppers. Because that one house out of all those properties was the nightmare. Everything else was rented. They had tenants, you know, and I had to learn a lot about you know, now being a landlord and maintaining and being a manager and things like that. But by the time we got rid of that house very quickly, so I learned a lesson I have a huge appreciation for people who go in and fix stuff, even the single family investments that we do do they’re typically creative financing subject twos outside of the fund. They’re pretty houses you know, I tend to focus primarily on really nice houses really great locations. Don’t need a lot of renovations no more than maybe paint and flooring. Worst case scenario if that. So but the same with our multifamily selection there, too. I like nicer apartment buildings, better locations fully occupied, very little to do with them other than invest, you know, and raise the rents here and there. But, but but that’s it. No, no, have you fixer uppers. But to your question? Yeah. That was how that worked. Very little single family. But I have done quite a few single family but they’re de risked.

J Darrin Gross 8:37

I love it. I love it. Everybody’s got their start in like your, you know, relaying here. There’s a lot of lessons that you’ve learned as you go. And hopefully none of them are big enough to sink your your dreams. But, you know, there’s a lot a lot of battle stories and war stories that everybody can tell. And, and it’s all part of the education. That’s That’s great. It is. So, so you started off. You said the mid 90s. Mid to late 90s. You were this is when you got started. Yes. And so it was it in that first year, then you ran into this portfolio opportunity?

Victor Bell 9:16

Yes. Yeah.

J Darrin Gross 9:18

And of that portfolio, you mentioned you sold the house right away. Did you retain any of the other properties? Or have you since Yes.

Victor Bell 9:25

So we kept all the other properties for a while I had a partner in those deals, and we eventually sold those off.

J Darrin Gross 9:32

Got it? And today what is your your? The asset class of choice and what’s your what’s your model?

Victor Bell 9:41

Right now with the real we have a real estate fund is a $50 million fund credited it’s a 506 C, that’s for multifamily B class properties, B locations here in San Diego County. That’s the target. We’re still pushing up that capital raise phase because of what’s going on in the market. So we’ve been highly focused You know, and on that piece right now, and we do do small, small properties, like, you know, residential stuff, small multifamily, we picked up a couple of properties in Hawaii since we’ve been here and turned around and resold those. But again, that was just like, hey, this is not fun related, we’re building the fund here. And, you know, again, because I do this full time and above, I pick up a deal here, too, from a side business for myself, those deals still happen. But the strategy remains the same. It’s like pretty houses subject to creative financing, you know, take the risk out for me, my investors, if we can get those, while we build capital on this side to go after the 80 120 to 200 unit deals, now we’re looking at those for the portfolio for the fund that that way, our investors have a better size of deal based on the scale, because it kind of takes the risk away for them looking at something smaller. Hey, Vic, let’s partner on this 2030 unit deal over here versus something that we can all take a part of, you know, and I’m sure you probably get that to being in the business that you’re in. It does limit the risk, there’s always risk. But it minimizes the risk when you kind of go bigger, and you’re collectively doing it with other people with somebody who has some experience.

J Darrin Gross 11:09

Yeah, amen to that. Definitely more doors and, you know, spread the risk around that. That’s a good strategy. So you’ve been doing this for a while now. And, you know, I was talking to somebody the other day. And basically, he was saying, Man, if you couldn’t make money in real estate in the last 10 years, the same for you, just based on how easy it’s been, you know, as far as with low interest rates, and in demand and and just, you know, capital chasing return. So, you started the mid 90s. We’re in 2023. Right now, last 10 years have been pretty, pretty outstanding. In fact, I know I started this podcast back in 2015. And I can remember, one of the first interviews I did, the guy was going yeah, we’re probably it’s a question, are we in the ninth inning? Or is this a doubleheader kind of thing as far as the cycle goes? So obviously, the interest rates have changed quite a bit here in the last year. Yes. What, what are your thoughts? How are you approaching the the marketplace, given the change in interest rates?

Victor Bell 12:31

very selectively, so, you know, because again, in multifamily, I’m sure, you know, from a commercial perspective, you know, I don’t know from the listeners to what magnitude but it’s all based on its income from one perspective, but that the market capital, you know, the capital changes, interest rates have risen, things like that as math, like I think from December till now, at some point, last December to this year, they’ve almost tripled, you know, because they’re like, 2.75. And, you know, they’re 6.7, like they’ve ranged across the gambit. Well, what that does is it, it forces people to look at the revenue of the property, the debt service ratio, and all that other stuff. That’s the 1.25 that banks want to see your 1.27 and multifamily, you can’t hit that your asking price has to come down or, which is the other alternative that people hate to hear is you got to put down more money. So you know, some of the deals we looked at, we underwrote them, we were under, oh, putting 40% down, you know, California, Hawaii, their higher price market. So I mean, the downpayment needs to be more to hit those numbers, we looked at a deal to and when we got the the underwriting back from the potential lender on the debt side, they were sizing up the loan, it was like a 65% down to make that deal work. And we were like, Whoa, who’s going to do that? So not that it was a bad deal, because not the whole part about it was to your point, nothing changed. The market changed around it, there’s a huge correction with that with the with the cost of capital. That makes guys like me go, You know what, let’s pull back, let’s put the pencils down for what we’re underwriting. And let’s just focus on the capital part. So we get an opportunity for someone who may be there a fund manager, and they have portfolios that they need to kind of look in, and I’m sure they would write down the portfolio and say, let’s get rid of these assets that would have normally come to market, because they’ve had to write down the values based on current, or syndicator, who got in two years ago executed their value add plan, they promised our investors they’re going to give them you know, some huge press return as well as, you know, some massive upside and they go to refinance, and they didn’t pressure test, what it will look like, had their rate not went past 5.75. Now it’s 6.75. Whatever it is that they have to exit on or refinance on, they can’t. So that’s been something that we’ve looked at one, put the pencils down, raise the capital, and then if an opportunity presents itself because someone has to exit based on a timeline, maybe not because they want to Sell because they have to, we can take advantage of that. So that’s what we’re doing different. That’s what we see in the market. You know, and I have a theory, I’ve been saying it because I’ve saw it happen in Hawaii quite a bit. If people don’t start investing with a syndicator, and or fund manager who understands what they’re doing, and start collectively investing with other people, they won’t have opportunity to get some of the better deals that they saw, to your point, because they’ve been played over the last 10 years, primarily, really over the last five. So that said, you know, somebody who’s just sitting on that old strategy of you know, find it, fix it, sell it as multifamily commercial deals, you know, things like that, they’re gonna have to change strategy, and within the changing of their strategy is going to come through collaboration with other investors.

J Darrin Gross 15:46

Ya know, it’s interesting, you mentioned that, you know, obviously, commercial debt is structured differently than, you know, single family residential, where you can get 30 year terms, most of it has some sort of a sunset, somewhere between five and 10 years is what I think most, most have, I think there are some programs, I know, they go out further, but but there is a natural date, an end, or a, you know, a reset date. And, you know, it’s going to present some opportunities, based on just whether whether the investors are done with it, because they have made it unable to return to the capital that the investors were expecting. Or they’re just, you know, they’re ready to let go of it or, or just they want to sell and, and, you know, but the price is a little different than what they had planned for an exit. And are you seeing prices? Are they are they? I mean, are the sellers reflecting? Are they have they adjusted to the market yet? Or are you still seeing that everybody’s still trying to get the higher, higher price?

Victor Bell 17:09

It feels like a standoff right now. So sellers aren’t really dropping their prices, and buyers aren’t really raising their offers. So I think there’s a middle ground of that’s going to change. And I think we have probably about a 12 to 18 month window, opportunity that something is going to shake out somebody, like I said, you know, if you have a bigger group, you know, you have some of the larger apartment building groups that own stuff and or, you know, the Blackstone’s and KKR is, and things like that, that do have assets that they’ve held on to that have a horizon. So they promised their investors above them, five years, we’re going to turn and Brian this thing out, and you know, they have to sell, those are going to be the deals. But to my point, if you’re a smaller person, you’re like, I got money in an IRA, I’m accredited, but you know, I have a business to run, and I don’t have time to learn this game, you know, those are the deals that you will miss, because you can’t grab those deals by themselves. And I’m sure you’ve probably seen in your area, too, like you have these bigger deals that are trading, and they’re still trading at four and a half caps. You know, fours, you know, some point 3.75, but they’re better quality assets, they’re institutional. And I think, now is the time for the everyday investors to actually get access to those type of deals when we would have never been able to, because their timeline, you know, the debt is forcing those people to come out of those deals, and not, the seller doesn’t want to sell them. So you know, the owner, the owner groups don’t want to. So I think that’s really going to be the opportunity. So that’s what I’m seeing in my market, the prices aren’t changing, but the level of person that still will buy those properties, even at that current, you know, what does use cap rates, because everyone talks cap rates, even somebody who can who’s looking at a four cap deal, that’s a great location, great asset, it is cash flowing, has the wherewithal to take down a four cap deal and it not hurt their returns, because they’re like it, if we get forward fine. We just want this asset, we want this location, we’re not going to lose our capital here, because we have responsibility for all of the capital that we’re investing for our investors. So that’s why I also made the move to I was like, What is everyone been doing? I saw this happen in Hawaii, California is 10 years behind the Hawaii market from what I saw, and I wish I would have, I would have bought more property than I even tried to buy some of my old apartment buildings back since I’ve been here. And I couldn’t get it, you know, even at today’s price within you know, almost five or $600,000 More than I sold them for, you know, I don’t like I wish I can get them it’s still a good price, because rents have gone up. So that’s what’s happening, you know, that made people still say, you know, what, how does that even make sense? will rent still make sense because we’re really buying the housing, we’re not buying real estate. So you know, He who controls the housing in the market wins and that’s that’s kind of what it’s turned into. Be.

J Darrin Gross 19:55

You know, it’s interesting. I I’m sure there’s the math makes sense. I haven’t to sit down and kind of work through the numbers, but if if, you know, with lower interest rates, more affordable debt, even with lower cap rates for a long time, you could still get into a deal with 20 or 25%. Down. Are you seen the returns? What are the returns that you’re able to? You know, figure out? If you’re coming in with 60 or 65%? Down? Are the returns muted from where they were? Are you? Are you are you able to continue to get comparable returns?

Victor Bell 20:39

Well, we won’t do that, that 65% down, you know, we’re sticking to the, you know, a 40 45%, which still makes our offers where they would have normally been at the better debt rate, right. So whether that’ll be accepted or not remains to be seen, which is why I said we’d waited out for the right property. But would do to do the returns pencil for the investors. Yeah, because we’re not over promising our investors. So I’m ridic. You know, that’s the problem, people, we’re gonna give you guys a US eight pref, you know, plus, you know, 20% 40%, or 70% of the deal. So we have an 8020 split with our investors, we don’t have a preference turn, because I understand, hey, we have a target return of 55% per year, you know, our 15% internal rate of return. Because of the type of deals we’re looking at, we’re like, hey, we can double our equity on the resale or refinance, or whatever it is that we’re going to do, we know we’re going to hit that based on our target income per year. So it’s a little different, you know, but I stick to that model, it just makes sense. It’s already proven for me, it’s been an investment thesis that we’ve worked on for a while long as we can put a down payment down, we know we’re going to get get to 5% per year on that hold on a seven year old, usually shorter, I tend to refinance between three to five years, and pay my investors or capital back and then we stay in the deal. And then we resell it after that last term, or know what I know. Now it just refinanced again, and kept those deals, pulled out more money, still been a non taxable event, and just kept them floating. But to your point, yes, that’s how those guys are getting returns. And then even the people who get in, let’s say, you get into you buy a four and a half cap deal. You know, you got to go in with the intentions of, hey, this deals a good deal, we can do the minimal here, raise rent, stabilize it. And we’re going to turn around and refinance based on that cap rate. Right. So you know, five cap like it, and I will run the numbers on burn time on the show. But you figure out a four and a half to a five cap deal. You know, my target is always can we bought rents 600 bucks in this property over a seven year period, you know, and that’s happened a lot faster for a lot of different people, depending on the market you’re in. But that’s a realistic thing. Like if I think this location will warn another $600 More in rent over the next seven years. At this cap rate 5% cap rate, I know we’re going to make our downpayment back, we’ll probably double our downpayment, right? Well, we have in it, we’ll make that on the back end, and we’ll get paid to wait. You know, while we continue to push rents to that level, and if we can do it fast, we’ll do it fast. If it takes a longer time to do that, we have the time to do it. Because I’m in multifamily. You know, I’m sure your listeners know, and you’ve seen it too. It isn’t like a house where you know, you paint it, you do whatever to it, and then you stick somebody in there. And you know, in 12 months, you may sell, you know, sometimes with multifamily it costs you to get out early if your plan is not in place. So a lot of your returns are built on this middle ground, long term investment that makes sense for your investors. Yeah,

J Darrin Gross 23:43

you know, yeah, and again, kind of to the comparison of the market air of the last 10 years versus the last year and kind of on the near near future. Are you seeing that? Are you underwriting for longer hold times than what you were previously?

Victor Bell 24:05

Ah, no, I think the horizon of seven years is about right because that’s been my experience you know, the lender is going to be like you know, your debts probably going to be three years minimum, you might have like three years interest only then I’ll switch over to you know, principal and interest for the next two or something but but there’s still a horizon that we have to target. You know, a lot of guys who are like, Hey, I got multifamily, they’re typically doing like short term debt, and then no refinancing into long term debt. So there’s still like you said, you know, the understanding when you when people understand that the debt really controls to optionality to sell or not. So when you get your financing some like, if you go I’m gonna get a three year interest only on this apartment building. Well, you know, you may have prepayment penalties or you know, defeasance or your maintenance or something in there. If you try to get anything and sell out early, it may cost you more to sell me to watch our profit and depending on which state you’re in your taxes may do that as well. So all of these things have to be brought into account when when I look at a deal, my Alright, can we stay in this deal for seven years? And let’s say seven years hit, and we’re in another market correction? Can we maintain and keep these deals? Can we say, Look, you know what, we’ll just hold on to it. We’ll wait. That’s the long game. I think that’s missed a lot. Everyone’s you know, it’s like fast money. The days of Fast Money is over. Yeah, there’s still money available. But that doesn’t mean that you know, that that game is going to always be able to be accessible.

J Darrin Gross 25:36

It’s kind of weird. I I recognize there’s a lot of capital looking for deployment. But it’s kind of cautious capital. It’s not, you know, the easy capital debt. That’s been pretty easy up till now or last six months or so. Yeah. So, you know, the fundamentals of the housing market? Do you see any changes as far as like demand? I mean, or, you know, affordability as far as like, you know, the the alternative is, you know, people instead of renting they buy, I don’t see that changing it at least in most of the markets that, you know, are, are in demand where there’s, there’s jobs, and there’s, you know, people are moving to the States are the areas that you’ve you’ve mentioned, I would characterize as kind of high demand. How do you see any of the, the, you know, the indicators, or any of the characteristics changing that that? You know, make it less of a bright future for for real estate, especially multifamily?

Victor Bell 26:53

No, I think the multifamily is always going to be the belle of the ball. I think people have caught on to the fact that, hey, look, this is fine, even institutional investors and foreign capital and stuff like that is kind of pushing into the United States, or access to multifamily. As it relates to, you know, the base homeowners like, this is something that’s, you know, there’s what 80 million baby boomers and you know, 76 million millennials, and they’re all rushing into rentals, like the rent the rent by choice, you know, you have people with money renting now, as opposed to, you know, our my parents, and probably your parents, too, it was like, that wasn’t the way it was like, Hey, you own your home, you buy a home, it’s a little piece of your own thing. And now that’s people want flexibility. You know, and do you want to cut your own grass? Do you want to, you know, fix your own roof, you want a swimming pool, you want a gym, you want the amenities that you would normally get in a resort, and people are willing to pay for that. You know, I see that a lot. I mean, we moved here we rent. I’ve always rented beachfront homes, oceanfront properties, you know, and then we were, you know, we lived there for years, and we’re like, you know, what, I think we’re ready to move on to a bigger place or a nicer place or a different place, you know, what allow somebody who has capital, the flexibility, so, you know, and you couple that up with people trying to buy a home, depending on the scenario 20% down on houses that used to be 600,000 other 800,000 $1,000,000.02 100 grand that has to go into that. And, you know, now your rate, 6%, six and a half, seven, you know, on that 800,000, you know, let’s just say 5600 to 6000 a month, or you can rent in the same zip code, really nice apartment, two bedroom, you know, swimming pool Jacuzzi Fitness Center for 4000 or 3000, or whatever, wherever people are, you know, that those are people’s new choices that weren’t available. And as people you know, especially after COVID People work remote, so that became this new thing like, Hey, I don’t want to deal with this. I think real estate investors are scared people enough talking about the crash of Oh, eight and oh nine towards the younger people heard that online, you know, social media stuff like that to where they’re like, Yeah, I’m not gonna go through that. I remember the frustration of that they didn’t know what it was like me. But they remember the time that people were struggling through stuff, and they’ve seen it and they’re like, Yeah, I’m just gonna make a lot of money live where I want travel, do what makes sense. So I think that’s really what’s driving everyone. And, you know, we are going to become a renter nation, it’s already happening, you know, Lyft, Uber, GrubHub. You know, it’s no different from where we live. So that’s, that’s a part of it. And people who take advantage of that opportunity to, you know, take on with that renter wave that’s going to continue to happen for my kids, grandkids, things like that, you know, they’ll be fine in the real estate industry. So I think that’s really where things are.

J Darrin Gross 29:52

So what are your thoughts with the the the recession talk? You know, we’re Definitely we’ve got higher interest rates. You’ve already commented, you know, there’s a gap between the buyers and sellers. And you’re kind of a if I’m reading the right that you’re kind of in a wait, you’re raising capital, but you’re kind of waiting for the opportunities. What are your thoughts on on looking forward? And with respect to any kind of recession? Do you think we’ll be able to avoid a recession? Or do you think that that’s just a foregone conclusion?

Victor Bell 30:31

I think we’re in one now. I really do. I think, I think that’s already happening. I think it’s hit everybody. But I think because there’s so much information out there, you know, it’s like, you know, when you’re inside of the mayonnaise jar, you can’t can’t see the label. So I think there’s so much information about it coming, you know, on all the social medias by people who are kind of pushing that idea that people are missing the fact that prices are already up, people are already not spinning jobs are already cutting back, people already, you know, aren’t making the money that they thought it’s already here. So you might, my thing is always like, hey, look, if you have a business, you need to focus on making more money, you have real estate, you need to focus on acquiring more assets. If you have a capital company to acquire assets, you need to focus on raising more capital, you need to go ahead and stay active in the world, towards those things don’t hit you, we call it create your own economy. So that way, it doesn’t matter what the outside economy is doing for you. But for you and your family, you can continue on, you know, by building your own, you know, building your own audience, having your own people and servicing that community. So you make your community better, you know, within your own business and investments, you know, while taking care of those things. So yeah, we’re already in that recession. But I think the smart people have already saw that and was like, Hey, we’re gonna do something about it. And the other people are kind of looking at it, like, how do we prepare ourselves and pack enough food away? So when it hits, we’ll be okay. But that wave has already crashed on them. And that’s usually how this works. And I’m sure you know, back facing, we look back and go, Man, I wish I would have done more stuff. I didn’t know that was happening. And then later when you come out of it, and everyone else is winning, and then that starts the next level of chasing, yield chasing deals like dude, you missed it,

J Darrin Gross 32:15

Yeah. Yeah, there’s definitely a like, like, the mayonnaise jar thing. You know, when you’re when you’re in it, it’s hard to see it. It’s more of a hindsight, kind of a thing. You know, I’m kind of curious. I mean, you know, the, the last, the only thing was kind of a debt crisis, it was capital just went away. While interest rates have have crept up, I’m still hearing about deals getting done. But they’re, they’re not as not as many being done. And clearly, there’s a standoff between the buyers and the sellers. But you’re not hearing about like, I mean, he argued about some tech layoffs kind of thing. But prices, you know, the groceries are up, the gas is up, the energy is up, interest rates are up. I’m just kind of curious, you know, if you look back past 20 years, go back 30 years. And when interest rates were higher, and you know, that was kind of the standard. Do you have any sense of that this could be the new normal. I’m

Victor Bell 33:35

not uncommercial maybe like some of the residential I look at it, like the gas prices, there’s no reason to lower the gas prices, everyone’s already used to paying four or five bucks for gas. So you know, no, people stop complaining, we know it exists. So I think it’s that I remember doing deals back in the 90s and stuff like that early 2000s. And if I had to pay a 12%, or 11% 10%, I was happy to get it, you know, we have a mindset that, you know, the money I can get you is the cheapest money on the planet. So, you know, it’s you know, and I think, people, if you weren’t doing deals back then you didn’t get it. That’s why people I call it seven and a half, like, Good, let’s go. So those deals are still happening when you have someone who has the experience enough to say, look, the rate is only a part of this business. So if the rates a little bit higher, you know, like we said, for multifamily smaller multifamily, that makes it a little bit tougher, because you know, that rate affects how much cash flow you’re getting and how much cash flow you get is indicative to whether the lender is going to give you that money. But let’s say some value add deal, like we, you know, for, for example, we did a hard money loan, which was you know, I can’t remember the rate was like 15% It was ridiculous. We rolled in the first year we had to go and release the property because we had a tenant move out, and it was a nightmare. But we turned around and you know, we had to get out of that property, do some negotiation back with the financing, you know, negotiate away a second debt. That was also a high rate, but we still may Money on the deal because I knew what I was doing. So to your point, yeah, you do have that you have that high cost, you have the rates and stuff like that, will it become a normal environment, it actually has always been the same environment, what we just experienced was actually not a normal environment. Rates were never been that low. And, you know, but to that point, though, to your point, a lot of money got made during that time, so they can forego, you know, the tech guys went in and borrowed a bunch of money, or they raise funds for those things. So they’ve already prepared for these moments that they have a war, chest off to the side to say, look, we’re going to lay off non essentials, we’re going to keep it moving with the development of what we’re doing, because we have a multibillion dollar horizon on this evaluation on this company. So it seems like to the outside of the middle class, the you know, people were like, man, like, it’s tough out there, you know, but everyone else has already built that war chest through the low cost of capital and the people who know what they’re doing, or like, look, I can play in both markets. I can, you know, so so, you know, so to answer that it’s a, it’s a loaded answer, you know, but But it kind of trying to hit all points of that. So that way people listening are like, Oh, that makes sense. I know what I’m doing when the in the high in the high interest rate, I know it were, we made a lot of money in the lowest interest rate. So this is the new, the new adjustment, but that game is still being played. You know, so this will give everybody the opportunity to kind of learn that one as well that they didn’t experience it in the past.

J Darrin Gross 36:27

Yeah. It’s, it is interesting with a little little look of history. Yeah, kind of look back. What would you recommend the listeners be looking for right now, given the current environment?

Victor Bell 36:47

A higher quality of asset, if you’re going to invest look for I mean, it’s already hard enough to get it doesn’t make the sale, usually what happens is, as the cost of capital goes up, people look at lower level properties and say, Oh, I’m gonna buy this, you know, D property in the worst area, because this is the one I think I can fix and make the most money on and it directs me will actually address more risk. So right now, I think people should go to a better class of asset, maybe a little bit higher price, and look for partners and say, hey, look, let’s go ahead and let’s collaborate on these assets, get a better class of assets, we can ride the wave out in a better ship. And then that way, when it’s time to sell, we sell someone who still wanted rather than get an asset or invest in a deal, that’s not in the best area, you think you’re gonna get a high return, it’s a management nightmare. And when it comes time to get rid of it, you actually lose, versus actually sell because you have less people interested in that when the money comes back, and it’s cheaper. So that’s what I would tell people is just like, go after better stuff.

J Darrin Gross 37:48

And your Amen to that. Victor is preaching the truth there. I mean, that is I’ve I’ve had both ends of that, where I’ve had a lesser quality and a higher quality. And, you know, the lesson I’ve learned is always high tech, high quality is always going to be in demand, and any market and that that kind of speaks Stephen, like, you know, cap rates, if you look in like some of your major metro, areas where you’ve got these eight A class properties, and they trade at these ridiculously low cap rates. The reason is, is because there’s always you know, that you can always sell that property. Whereas if you go out and to lease and buy something that’s, you know, kind of rough shape, but it’s, you know, it trades at a 10 cap or something like that, I always tell people, well, I hope you love that. Because you may be that may be yours forever, man to be able to find someone to buy it. So. Hey, Victor, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider, we first look to see if we can avoid the risk. And if we can’t avoid it, we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, we look to transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. Yes. And as such, I like to ask my guests if they can look at their own situation and frame it however you would like could be your clients investors, interest rates, the market, the political environment, no pending war, however, however you would like to identify and and declare what you consider to be the biggest risk. And, again, for clarification, while I am an insurance broker, I am not necessarily looking for a an insurance related answer. And so if you’re willing, I’d like to ask you, Victor Bell. What is the Biggest Risk?

Victor Bell 40:05

Well, if I can give an honest answer, it’s short is not taking risk at all. Because it’s real. I’m a real estate guy. So I take a look at all risks and try to assess it as like, Hey, how can we minimize risk and get the match return, even if to other people that return is not a very big. So a prime example like when I look at an apartment building deal, and I really like it, we start sizing the deal up, first thing we do is we look at the debt, we find a debt person, and then I try to get an insurance person on the team to say, hey, what do you think the insurance needs to be here? Could you give me an idea to quote and arrange? Because I recognize like, hey, there’s two things that are gonna happen. And the most important thing to me is to make sure that I de risk my opportunities by saying, hey, there’s a nicer thing. But we have insurance, we have somebody that can take a look at this and say, Vic, this is risky, or this is, you know, there’s the cost is what you’re looking at. And here’s why. So I think the quality of asset going up, like we said, is the best way to de risk because it removes some of the question long term and short term and have somebody on your team that is in like, for guys like yourself, and it isn’t an insurance thing. It’s just real for me. I want to know, like, I don’t gamble, when I go to Vegas, I go for conferences, I don’t step one foot and play a slot machine, I don’t do any of that stuff. So it isn’t that I’m not aware of risk. But if you don’t take any risk whatsoever, that’s a loss. And then you also need to mitigate that risk by having people on your team who understand risk assessment, guys like yourself. But that’s an honest answer. Even when I call the bank, I’m like, hey, what can go wrong here, guys, and then they’ll tell me, or someone on my team or our broker, like like, I’m all about having people around me that can point out my flaws, because I have them like any other investor, I, you know, bright eyed, bushy tailed my want. So I hope that answers the question. And it’s not, you know, may not be what everyone else looks at. But I’m always asking that same question like, like, if I don’t take a risk, there’s a major risk in itself. But if I do take this risk, what does that mean for me and my investors? And who could I get to point out the things that specialize in that, that I may not even consider? You know, even if it’s cost, I gave it the insurance product on this things, arrange the roof about $800, you know, as opposed to, as opposed to you underwrote it, and budgeted around about four 450 That matters. And I’m like, Oh, why? Well, you know, paneled boxes need to be changed out, this needs to be done, like, like, all the things that most people just take a look at things that don’t think about. But that’s how I see risk, you know, take it, but understand the risk you’re taking and why.

J Darrin Gross 42:41

No, wise words. To your point, if you don’t take take risk, and you’re you played safe, you’ll never have any growth or you’d be losing money. So you got to kind of do something to get in the game and, and grow your grow your equity and grow your money there. So, yes. Hey, Victor, where can listeners go? If they’d like to learn more connect with you?

Victor Bell 43:06

Google, they can Google Victor Bell. They can go to Bell-Capital.com. That’s our website. You got to be accredited to invest with us. But we would love to answer any questions that you have about what we’re doing, how you can be involved. You can go to Facebook, Victorville, that’s our fan my fan page, you can go to Victor but Jr’s personal. Instagram, at the real Victor bell.com, Twitter, Victor bell 365. So LinkedIn as well, Victor Bell, or bell capital. So I’m YouTube. I’m everywhere. So you know, and thanks for having me on shows like this, this show is very important. People need this. I wish I had this. When I started. It was information that you’re taking the time to bring people on to have their conversation started, ask questions, share how they got into the business, it would have shaved probably 10 years off of a lot of learning curves that I probably didn’t need to experience. So you know, that’s how to get in contact with me and also wanted to kind of say, Thank you for having me and doing what you’re doing. It does matter. So I appreciate it.

J Darrin Gross 44:08

Yeah. Well, I appreciate that. Victor, thank you very much, for sure. Well, again, thanks for taking the time to talk. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Victor Bell 44:21

Me too. Thanks so much for having me. I really had a great time.

J Darrin Gross 44:24

Announcer 44:44

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Learn Apply and Grow Rich in Real Estate with Roland Gib Stewart – CRE PN #408

Roland Gib Stewart 0:00

What happened was, of course $10,000 Even in those days wouldn’t buy you a 14 unit complex. So I picked up the phone and I called a number of friends. And all five of them loaned me money. They loaned me from anywhere from $3,500 to $5,000. My college roommate said that $7,500 to own a percentage of the building and we bought it bought the complex. Now the big the big hit came about 15 days later when they said you’re going to be late with your first payment that’s gonna hurt I don’t know where I’m gonna find that money. Buy a home mortgage for myself to the hilt.

Announcer 0:48

J Darrin Gross 1:07

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk. When you invest in real estate, it pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more go to Building Insurance Risk.com.

Today, my guest is Roland Gib Stewart. Roland is an investor and a recently published author. He and his ex wife started with to $285 and have built that to $30 million in real estate and is still going and in just a minute we’re going to speak with Roland Gib Steward about how you can build wealth through real estate. But first a few reminders. A quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see our handsomer guest arm, be sure to check out our YouTube channel. You can find us on youtube bad commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Roland Gib Stewart, welcome to CRE PN Radio.

Roland Gib Stewart 2:56

Thanks for having me there.

J Darrin Gross 2:58

Well, I’m looking forward to our conversation today. I’ve known you for a number of years. And I’m excited for the listeners to get a chance to know you as well. But before we get started, if you could take just a minute and share with the listeners a little bit about your background?

Roland Gib Stewart 3:16

Well, my background is pretty varied and you’re in reality but I lived in. I grew up in most of the major cities on the West Coast. My father was a medical supply salesman, who was also Army Reservist. And as born in Seattle, most of my growing up was in Portland, Oregon. Then I went to Los Altos, California for a year, and then graduated Santa Monica High School and went to Willamette University ran track. I also played a little basketball, but that was ruined by some so I got ended up in informer infirmary, then army, United States Army officers candidate school, my orders to Vietnam were canceled 24 hours before I got on the plane, which I was very thankful for. Got out of the army toured Europe for three months and then tried to find a job, which was actually very harrowing experience.

J Darrin Gross 4:27

Well, let’s talk about how you got started in real estate. And what you know what, what was the first first thing you did? Or how did you decide that real estate was a good thing to invest in?

Roland Gib Stewart 4:44

Well, we, we had built up to $10,000. And we started to decide we needed to do something. And so we got an account with Merrill Lynch and had a very good stock broker that grew That’s it probably 12 or 12, five. And then he went to manage one of the, I think it was a Berkeley, one of the U Cal Berkeley investment funds. Very nice promotion for him, but he heard us, we got a new guy on the block. And he drove our account to exactly $0.00. So the next time we built $10,000, was kind of by accident. I actually had a reasonable job by then. And Bonnie, my ex wife got a very good job. She was a tire batteries and salesperson for Chevron USA. And by the end of the year, we did a draft tax return about November, we said, oh my goodness, we’re gonna owe the government $10,000. So she turned to me and she said, What can we do about that? And so we buy real estate. And so we went out and looked at all sorts of things. We started with single family, and then we moved to duplexes and triplexes, and we finally ended up buying a 14 Plex in Southeast Portland.

J Darrin Gross 6:20

Wow. So did you did you actually buy single family properties prior to that? Or did you just look at them?

Roland Gib Stewart 6:28

We just looked at him.

J Darrin Gross 6:29

Okay. Okay. And how long between the the November

Roland Gib Stewart 6:32

We tried to mitigate our risk Darrin.

J Darrin Gross 6:34

Yeah, no, I appreciate that. I get 14. Yeah, well, with a $10,000 bill to the government, that’ll make a lot of I mean that, that’ll get your attention. Yeah, make you want to see what else you can do there. So I get it. So. So from like, November, when, when you were doing this kind of pre tax planning kind of thing to when you actually bought the 14 units? How, how much time are we talking,

Roland Gib Stewart 7:03

I’m pretty sure we got it finished by the end of the year, because I don’t remember, write the check.

J Darrin Gross 7:08

That’s awesome. So you were able to accomplish it.

Roland Gib Stewart 7:11

But what happened was, of course, $10,000, even in those days, wouldn’t buy you a 14 unit complex. So I picked up the phone. And I called a number of friends. And all five of them loaned me money. They loaned me from anywhere from $3,500 to $5,000. My college roommate said that $7,500 to own a percentage of the building. And we bought it bought the complex. Now the big. The big hit came about 15 days later, when they said you’re gonna be late with your first payment. That’s gonna hurt. I don’t know where I’m gonna find that money by the high mortgage for myself to the hilt. So I took the city bus over to their office. And I said, I said, I can’t I can’t pay this. Now what is there anything we can do it? And they said, oh, we’ll just put it on the end of the contract. So so another person loaned me $2,400. So I was really a debt.

J Darrin Gross 8:24

That’s, that’s funny, the kind of the lessons you learn. So, your, your beginning sound very similar to mine. And I’m sure many others that I’ve talked with and others that are maybe listening. And that just absolutely just stretching as far as you can to to get the deal done.

Roland Gib Stewart 8:46

To do something, right.

J Darrin Gross 8:47

Yeah, to get to get into real estate. And so once you got in, how long did it take for, you know, there to be cashflow or to recognize that there was an upside and that you’d made a good decision. And it wasn’t, you know, he wasn’t going to continue to be you know, stretched from from limb to limb.

Roland Gib Stewart 9:12

So we were probably full for 24 months. So things look pretty reasonable. Then I had my first move out. And that was a breakout, I had to take a garden rake and rake it out because there was so much litter on the floor, and then I could vacuum it. So that was an experience that I said, Okay, if I can handle this, I guess I’m probably going to be able to handle this thing. And and then our second move out was a move out in the middle of the night. And Bonnie was in a law class for her Master’s. And I ran back downtown and I said, okay, the Prophet said you can ask any question, and he won’t charge if it’s in class, ask him what I can do about this. And he said well She came back out. And she said, he said you could help her move out. Well, that was a rude awakening. So no, right. So my first two move outs. And then then the, the ad recession, of course, hit us badly. And I spent a number of weekend days out on the street waving, waving balloons and or holding on to balloons and waving to people trying to get a move in. I posted notices all over Southeast Portland, and we survived.

J Darrin Gross 10:36

So you had the 14 Plex? How long did you end up keeping that?

Roland Gib Stewart 10:43

Oh, 22 years? Maybe?

J Darrin Gross 10:45

Okay. So quite a lot. That’s a

Roland Gib Stewart 10:47

Plus or minus? Well, we let it pay itself off.

J Darrin Gross 10:49

Sure. And then did you acquire additional properties? Or how did you

Roland Gib Stewart 10:56

Partway through that. Partway through that maybe eight years, maybe 12, somewhere in there. A friend of mine who was in real estate called and said, my business partner needs to sell. And all he wants to do is cover his costs to get out of a duplex. So we bought a duplex out in Oregon City. And so now we have two properties. And then short while later, something came up. Oh, I know, I had to move to Pendleton. I, I became the state labor economist for Northeastern Oregon. And so we were kind of, I didn’t want to own long term out there, I bought a house for us. And so there wasn’t much going on there. And then I went back to the director’s office, the Human Services was a budget analyst and Salem, and then I was free again. And when things came up, people wanted to sell I was a, I was a good target of people wanted to sell I was we we kept accumulating money, which was kind of mostly the way we were brought up. Bonnie was brought up on a farm, he never knew when the crop was gonna come in. So they were always living on a budget, and I was real malleable. She taught me how to save really early on, I still do.

J Darrin Gross 12:30

No, that’s, that’s a good, good habit to have. And also, you know, it’s a good a good opportunity when somebody has to sell or wants to sell, as opposed to the people that really don’t want to sell I think a lot of times what you see in the marketplace is somebody that wants a price, but they don’t really want to sell kind of thing. And if you’re trying to underwrite a deal. It’s it’s important that you know, what, what the numbers are, what numbers you can offer, and what makes sense, as opposed to, you know, somebody that doesn’t, and not offer more than what you can offer. Right kind of thing to make it work. So, so you started off, you got the 14, you’ve added some additional properties. At what point did you venture into other asset classes? Because I I’ve, I’ve known you for a number of years now and I know that multifamily is not something that you’re right. I don’t believe you’re currently in Are you still in any multifamily?

Roland Gib Stewart 13:32

No. Mostly family? No. I think we may have one. I think we’re down to one single family. Rental.

J Darrin Gross 13:43

Okay. So so what was it that what what was the the impetus for the, the the reason you exited that and, and for the most part, I got out of that and gotten to more of the what I know you do a lot of the the medical office and also some office slash retail, but what was it?

Roland Gib Stewart 14:09

Luck, luck and luck.

J Darrin Gross 14:09

Luck, luck and luck. Okay.

Roland Gib Stewart 14:13

So, I was we we were worth a million dollars that when I was 48. So I decided I wanted to retire at 50. So I retired at 50. And then a dentist friend of mine asked said, You’ve been in real estate a long time, can you help me find a place where I can expand my dental practice? So I did that for almost a year and we never found anything. In those days, dentists offices let out a lot of not very good smells. And so most landlords wouldn’t let to him or wouldn’t rent them out. So after about a year of that, the dentist was driving home and saw a vacant lot next to a Fred Meyer. And we Bonnie and I did a 1031 exchange and bought that. And then we went out interviewing developers. And after interviewing the third one, we were on the way back to his office to drop him off. And he turned to me, he says, I want you to develop this. And I said, Who me? Like, like, I have any idea what that would be like. And he went through and he said, you’ve negotiated contracts for 10 years, you’ve done this, you’ve done that, you can do this. So we decided we would go ahead and try that. And and if I failed, we had the guy identified. In those days. I think it was all guys, all three of them. Were guys, we identified the one we would go call and say, Hey, can you bail us out of the struggle. And it ended up being a homerun. So it’s like, somebody told me once, if you hit a homerun on your first one, you hit hit button singles and doubles and triples for the rest of your life, and you’ll be in great shape. So we were very fortunate.

J Darrin Gross 16:18

So you, I didn’t realize that you’d actually developed that, that that when there by the Fred Myers. So developing, I mean, what was the what was your experience there? I mean, that’s, that’s a different, you know, different exercise than just buying and operating what was tell me a little bit about the development experience.

Roland Gib Stewart 16:39

I was, I was totally lucky. So we went out interviewing architects, we found David Welsh. We walked into his office, it was like a third or fourth office we walked into, and the guy had real modest furniture and did edit. And we said, this guy thinks the way we want him to think right. And so we hired him. And he did a phenomenal job on that building. So that was the first thing I had to learn. And then the next one was okay, now how do you get a contractor, so we had three or four contractors bid. And one of them happened to be the husband of a woman that I was on a church committee for. And he, she told him, she said, You better, you better give, Gib a good price. And he gave us what I thought was a really good price. So we hired him, and the building went up. And we already had the dentist, ready to take two thirds of a second floor and we went from there.

J Darrin Gross 17:51

That’s great. So you’ve got a foothold on the medical office building, asset class. And like I said, I know that you have several other properties. And how quickly after that first one, did you look to expand?

Roland Gib Stewart 18:10

Oh, maybe six months? The contractor, not the contractor that did the building, the contractor that did the dentist tenant improvements. Called me, we went out to lunch. He said, We should build more of these. And that’s what got me back in. I would have been retired the second time I probably would have quit. Who knows?

J Darrin Gross 18:35

Yeah, yeah. So tell me a little bit about the the financing for these. I know that you you and Bonnie were were big savers. And you You did a lot to you know, make sure you had some ability to invest. But as far as the these other properties, what was the dentist? Was he a partner in that that first building Are

Roland Gib Stewart 18:58

We stuck until the end until the when we stopped? Okay, so five guys. The contractor that talked me into doing more David Welsh, the architect Sita who’s now totally retired because I called him on an investment last week and he said, I’m old enough I’m not investing in anything anymore. Now, whether that’s true or that he didn’t want to give me $25,000. Okay, so our contractor, architect, dentist, my army roommate, when I was after we graduated from Officers Candidate School, we went to Kentucky, both of us, and so we decided to room together. It was a CPA out of Florida. And me so there were five of us. We all put in $2,500 in a pot And we started.

J Darrin Gross 20:05

That was it.

Roland Gib Stewart 20:06

That was it.

J Darrin Gross 20:08

And so is far as going forward? I know, development is fairly, well, I guess it all depends on how the bank sees the opportunity. How much did your experience and your success in the the initial property give you credit? Or did it weigh in your success with with lenders and others?

Roland Gib Stewart 20:36

Well, I found a number of banks to be open to the idea that, if the architect drew the plans, he should get credit for that. Not that he would charge us for it, but he get credit for it. And the contractor couldn’t build the building. And the contractor wanted half of his fee in cash, but the other half, because he actually put the building together, got credit for that. So that’s that, I was the developer. And I didn’t want any money at all. So I got credit for that. And then each of the tenants that came in, most of them chose to do their own tenant improvements. So in those days, we were getting 10 or $12, a square foot per tenant, what if you came off the street and you were a regular tenant? The market was saying, you wanted 10 to $15 per square foot. So the bank would write in another line item that says this $15 per square foot was, was provided by the tenants. And then we had our down payment we put the building.

J Darrin Gross 21:47

Now that’s great. So and that’s, that’s basically the way it was put together than the the the each one of the investors were participants at a level of, of effort, which was then recognized by the banks in the in the early going. So is that correct? That’s great. And did you as far as the formal structure of the group, were you? Did you just five partners, each equal partners in an entity like an LLC? Or was there different levels of, of participation?

Roland Gib Stewart 22:33

A lot of research went into how much the architect should be worth, how much the contractor should be worth, how much the developers shouldn’t be worth, etc. And we put those numbers into an LLC, and each of us got that amount of share. It’s an LLC, and it changed over time. By the time it was over. There were only two of us left.

J Darrin Gross 22:56

Gotcha, gotcha. So, in in from the first property to today, how many years have we are we talking about? Me second. I think I probably started the first one and 1998 or nine? So 25 years, I guess. Okay. And, and your strategy, have you sold any of the buildings? Or has it been? Have they all been long term hold?

Roland Gib Stewart 23:39

Long term hold? Okay. And that’s, you know, varies by building who all’s in because not all the tenants came in. And we were really fortunate because we were out of money after the first building. Is $12,500 doesn’t go that far. Okay, so. So we met a group of accountants, they had their own LLC. And I and we were fortunate enough that they decided we had a good plan, and they come with us, and they brought a chunk of money. And that allowed us to build the second building. same premise it I didn’t get paid the architect and the contractor go 50%. By then Barney was doing the books because my army partner came out, looked at the property and he said, This is too big. Somebody’s gonna get greedy and you’re gonna be in Alaska. So that’s the way that went. So we were down to four. Barney should have probably been allowed to take over the barrels share when he bailed out. We never thought that far ahead.

J Darrin Gross 25:00

Sure. So in the so that when the accountants came in, were they again, they were partners in, or members of the LLC, at the percentage based on their participation.

Roland Gib Stewart 25:15

Their participation was based on their needs mound of money, and we gave them for building 234, and five, we just spread the money out among those, and they became LLC members based on those.

J Darrin Gross 25:35

Got it. But there was never, I guess what I was curious to understand, because so much of what I hear when I talk with others is syndication or, you know, JV, or it’s rarely do I hear people talking about just kind of, you know, participating in a long term investment at a level that represents, you know, what the worth, you bring kind of thing or the, the amount of cash you’re bringing. In, you know, as far as the LLC goes, were there any, is there anyone? That’s the general partner? Or is it everybody just, it’s all the members are based on the percentage of that was determined based on the value

Roland Gib Stewart 26:19

Voting, percentage voting.

J Darrin Gross 26:21

Okay, okay.

Roland Gib Stewart 26:23

I’ve told people, anytime anyone wants to bail out, I’m more than happy to buy them out. If the LLC doesn’t. But every time it’s happened, everybody else in the LLC is distributed among the members. Right? So it’s easy, and it’s really easy to form an LLC, as you probably know. And that’s the only thing I was smart enough to do. I mean, when we, when we formed the LLC for the first building. A guy who’s become a friend and has been retired five years, he told me yesterday, drew up the papers for the LLC. And so this is my template, we go forward.

J Darrin Gross 27:12

Ya know, it’s nice to have a template as opposed to having to constantly redo or any, it seems to me a lot of the the simplicity of your structure, it could be part of the secret. Whereas I think a lot of a lot of investors that I speak with, the goal is to get in and then get out. And the attraction is, you know, more of the, if you can get in, you can increase the value, and then you can get out fast, you know, obviously, your, your, your, you know, your return looks significantly greater as a quick hit. But then you have challenges, you know, if you’re, if you’re able to do a 1031 exchange, or if you’re just gonna give most of that back to the government kind of thing. And were you with a long term strategy and the fact that all of your present like the majority of your investors have stayed in the whole time. And had some sort of a, a, you know, a long term commitment to the, to the the plan was there, you mentioned that, you know, occasionally there have been people that have wanted out, and the LLC is has bought their, their shares. Was there any, when you were putting this together, and you were getting everybody together? Was there any talk about what the long term goal was? Or was there ever anybody that was not in the same frame of mind?

Roland Gib Stewart 28:44

Well, I think of the first five people, okay, architect, contractor, dentist, my army roommate, me, I think everybody thought that that was going to be long term. Pretty sure. That positive I don’t know that we ever discussed it. We just put $12,500 in a pot and started on our way. I bought a I bought 12 and a half percent in a film company last week, okay. And I think it’s going to reach not full value. Okay. But I think I’m gonna get maybe a 200 300% return in a, like a three year time period. And I expect by five years, I’ll be 500%. And then I think it’ll probably keep on growing. I mean, the kid that’s running is 32 years old. He has 11 years experience in the film industry, and has developed books. I mean, this thing’s out of sight. So for me, it’s a long term Right, I’m going to be dead, then my kids.

J Darrin Gross 30:05

Right. But the the opportunity, I mean, you, you’re not one that’s always looking to get out, you’re looking to get in and grow something for the ongoing revenue stream. Correct. And I think that see, that’s, I think one of the things that I’ve always appreciated in our conversations over the years is, that’s my mindset has always been to get in. And it’s the long haul, it’s not always been about getting in and getting out, which I find so so many investors, they want to get into real estate, because they’ve heard about all the, the, you know, the big wins that people have had, but don’t always recognize the time that usually is associated with, with most real estate investors who stay you know, there’s a, there’s a big opportunity to win over time. You know, and there’s a lot of the value add, where there was people who were either tired or didn’t keep up with the market. And you know, to bring that up to market, you can, you can do that kind of thing. But, but really long term. You know, that’s always been my mindset. But let me ask you a question about debt with long term investment. When I first started to invest, what I first saw was that if I had a tenant in my rental, and they stayed long enough, whether it was them or them and others, that eventually that the note that I had against that property would be down to zero. And that would be I looked at as like another 401k. And that was the limit of my understanding of real estate. How do you see the use of debt? With with the portfolio, you have partners? Is it. I’m just curious, how do you how do you view the use of debt for or ongoing?

Roland Gib Stewart 31:58

Well, I think I’m coming to that reality right now. Because I basically wiped out all my checking accounts to pay my tax bill this year. That’s the first time I’ve been that low in a long time. So. So I have a feeling next year is going to be tough. So I probably will start accumulating debt. But again, ideally, I have 20 years left, I mean, I am, I have such a good life. It’s unbelievable. And I want to take every day out of it that I can, and if my health continues to be reasonable. And I get to still exercise as much as I like to in a day. And I can still make investments like I did last week. I’m excited every day I wake up. And it might mean that I have to start accumulating debt. If that’s the price, I’m here. And as long as I can stretch it out, make the payments, I’m in good shape.

J Darrin Gross 33:03

Right. And as far as like your real estate it have you had goals to pay off the debt, or have you have you you know, refinanced and done cash distributions?

Roland Gib Stewart 33:17

We’ve done cash distributions, but we have, yes, and almost all of our real estate will have second to last one paid off in three years, and the last one will be paid off in six.

J Darrin Gross 33:30

Wow.

Roland Gib Stewart 33:31

Then everything we have, in all the states is all free and clear.

J Darrin Gross 33:37

That’s, that’s impressive, and I appreciate you sharing that because that’s, that’s something that, again, I think that especially in the low interest rate environment we just came from, there’s a mindset of, of younger investors, newer investors just get leveraged up to you know, leverage as much as you can, you know, and in the short term, I think, if you if your plan is to get in and out, it makes you can make sense of that. But for somebody it’s really looking to hold something for the duration for forever. It clearly the strategy with debt is a different strategy. And, and, you know, you may not get the interest rate off, but you also don’t have the debt payment. So, you know, I appreciate you sharing that because that’s that’s not something that’s that’s something that’s been the that I’ve had, you know, other guests comment on because I think a lot a lot of them are don’t have such a long term hold view of of the situation,

Roland Gib Stewart 34:47

and I just might not be smart enough to do the right thing. I mean, well, the comfortable with that, you know, I do the best I can, as creative as I can be and The I take the risk that I find to be reasonable to me, right? The other day, I met a young man who just seem to be potential potential potential, right? And I asked him where he was going. And he told me and I said, Well, wait, why aren’t you going there? He’s because nobody has any money, which you and I know, is false. I mean, that’s just false. If somebody wants to do something, I can teach them how to get to $50,000 within a couple of days, right? So they got want to do it. Almost anybody can do it. So I said, Okay, you got $100,000 My money? Let’s go do something. So we went out, and we reviewed four different companies decided to buy one of them. And he’s driven the company from 400,000 to $3.2 million over four years. So I mean, it was a lucky, lucky bet. I mean, he could have gone bankrupt, right. But I could have been stuck with another $300,000 worth of debt, because we bought the company for 400,000.

J Darrin Gross 36:09

Wow. Well, but But again, I think the you know, you are, I don’t say you’re unique, but I think you are rare, in that, I think most people, and I say most, most people listening to this, this podcast, are entrepreneurial, or looking to invest or looking for some way to increase their lot in life so that they have more assets, more time, more more cash flow, then they’re financially free. And that’s really the goal of, of, you know, I think most everybody listening here, but by and large in the masses, that’s not, you know, that’s not the case, there’s, there’s always a way to look, look to spend more than, you know, or everything you make and more. And, you know, not understanding that you need to do something beyond, you know, your your eight hour or your 40 hours a week job, where you’re working for for someone else. And so I appreciate you kind of kind of sharing it.

Roland Gib Stewart 37:13

Well, I explained to somebody the other day, I said, hold it, if you really want to do this, and you have $500,000 worth of debt available on your credit card, get the 500 that or the $55,000. Actually, it’s 500. You take the 500, and you do it, and then you make it grow. And it’s up to you to make it grow. And then you pay off that damn credit card, because that’s drowning, you realize that 16 or 18%? And you should be having that money for yourself, pay it off, decide?

J Darrin Gross 37:51

Yeah, no, that’s, that’s, you know, the, the availability of debt is endless. There’s always, always somebody out there looking to lend you money, and recognizing the the cost of that money. And, and, but also, you know, like you just mentioned the opportunity, you know, if you have something you really want, and you believe that you can go forward and improve your situation, whether it be real estate or business opportunity, and you know, that you know, that you can do this. I think that’s more power to you. I mean, because that’s a great. I know, the more I’ve talked with people on on this podcast, and the more I’ve gotten to understand the real estate have also come to understand the opportunity for people that own their own business. And, you know, real estate, real estate is a business, it’s not just a, a rental property. I mean, when you when you’re, you know, especially when you’re buying commercial properties. And, but But there really is an opportunity to grow and improve your, your, your end result for your own personal finances. So I appreciate you sharing that.

Roland Gib Stewart 39:06

I don’t know if it’s true or not Darrin, but to me, there’s a shortage of really motivated people. I don’t know if that’s true, but I surely I keep looking for people to invest in right. And my goal at the beginning of the year was my New Year’s resolution was to start associating with younger people. And so far, I started to be successful in that. I think that’s important to get, get get there and talk to them and learn from them.

J Darrin Gross 39:44

Ya know, definitely. That’s what’s coming in as opposed to what’s already been probably a good good strategy if you’re looking for the future and investing in the future. I believe in Yeah, well, good, cuz we need, we need to, we need to have something positive look forward to. So that’s good. Hey, Roland, if we could like to shift gears here for a second, my day, you know, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And if that’s not an option, we look to see if there’s a way we can minimize the risk. And if we can’t avoid nor minimize the risk, then we look to see what could transfer the risk. And that’s what an insurance policy is. And as such, I like to ask all my guests, if they can look at their own situation, could be clients, tenants, investors, political. However, however, you would like to identify what you consider to be the biggest risk. And for clarification, again, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Roland Gib Stewart, what is the biggest risk?

Roland Gib Stewart 41:19

I think right now, the biggest risk is the availability of money. Okay, so we got a lot of money available today, right? So in July, when we, the country hits its debt limit, what’s going to happen? Are we going to all collapse? Is this whole thing going to just the glass is going to break? And we’re going to all be wondering, Can Can, can I really get the money out of my credit card? I want to eat this week. I’m having fun. How do I continue this? So my biggest concern right now is that somebody’s gonna push us over the edge, which I think will damage the entire world’s economy, and our country will never be covered. And I don’t want that for my kids or my grandkids.

J Darrin Gross 42:13

Yeah, no, that’s, that’s a kind of a depressing thought to think about. But there’s a lot of a lot of pressure. And I think the thing that always gets me going kind of frustrated is that how many people have the ability to push it beyond for their own benefit? While I’m not necessarily concerned about the consequences kind of thing, which that’s kind of a personal perception sometimes. But I get it. Roland, we didn’t yet mention you mentioned you’re an author. But tell us a little bit about the book you’ve written.

Roland Gib Stewart 42:57

I brought it over, Learn, Apply and Grow Rich.

J Darrin Gross 43:04

Okay. That’s a that’s a good 123 there like that.

Roland Gib Stewart 43:11

I’ve never considered myself really smart. But when I first got into real estate, I had one heck of a lot to learn. Shortly after I got I got to be pretty friendly with the chief lieutenant for the contractor that sold us the building. And a few months down the road, he says, you just need to know that your two worst nightmares, as long as you stay in this business are going to be keys. And the second one is parking. Yay. Two of my things that haunt me are keys and barking Luckily, I’ve pushed that off on someone else. But let me tell you, those are those are the two things you got to worry about.

J Darrin Gross 43:55

That’s That’s funny. The keys and parking definitely, definitely something to be concerned about. Roland where can the listeners go if they’d like to learn more or connect with you?

Roland Gib Stewart 44:10

My email address is continueforward@live.com And it’s just all spelled out. Continueforward@live.com.

J Darrin Gross 44:23

Got it. Roland Gib Stewart. I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. I always enjoy when I talk with you learned a lot and I look forward to doing it again soon.

Roland Gib Stewart 44:37

Thank you, Darrin. Appreciate it. Take care. All right.

J Darrin Gross 44:40

For our listeners. If you liked this episode, don’t forget to like share and subscribe. Remember, the more you know more you grow. That’s all we’ve got this week. Till next time. Thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 44:59

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Multifamily Investors Interest Rate Pain with Neal Bawa – CRE PN #407

Neal Bawa 0:00

So your average syndicator buys 10 properties, right? I think what’s not obvious in the industry is that three or possibly four of those properties are already underwater, because they already had these floating loans. And these floating loans went up, they hit their cap, some of them didn’t have a rate cap, so they still going up. And the ones that have hit the red cap rate caps usually been set to like 8%, or something like that. And so at, so they’re at the rate cap there, they’re still the rate cap companies helping them with their mortgage payment. But still, their portion of mortgage payment means they’re still illiquid. Now. Then there’s the bigger problem. Banks are realizing that your rate cap may be expiring sometime next year, let’s say it’s, or this year, maybe it’s maybe it’s August this year, October this year. So guess what more and more banks are doing at this point, Darren, they’re calling you and saying, Hey, we’re seeing that that rate cap is going to cost you about $700,000 When you get it and we require you to get that rate cap in October unless you’re selling your property. And even if you’re selling your property, even if you have plans to sell your property, look, we can’t do anything about this. We want you to start escrowing 50 to $70,000 a month for you to buy that rate cap when it comes up in October.

Announcer 1:14

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:35

Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s program is sponsored by Building Insurance and Risk. When you invest in real estate, it pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to BuildingInsuranceRisk.com.

Today my guest is Neal Bawa. Neal is the founder of Grow Capitus, an online multifamily investor education platform. He’s also an experienced syndicator developer, and his attention to the data has earned him the moniker the Mad Scientist of Multifamily. And in just a minute, we’re going to speak with Neal about the Feds Gambit with rising interest rates and their impact on commercial real estate.

But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network and while you’re there and please subscribe. With that I want to welcome my guests back to CRE PN Radio radio. Neal Bawa, Welcome back.

Neal Bawa 3:31

It’s great to be back Darrin interesting times so interesting conversations.

J Darrin Gross 3:36

No that’s that’s always a guarantee with you. But definitely the the times are a changin before we jump into the conversation if you could take just a minute and share with our listeners a little bit about your background. Sure.

Neal Bawa 3:51

I’m a data science technologist, successful tech career successful tech exit. I work with about 900 A little over 900 fairly nerdy data driven investors a lot of them from Silicon Valley, and I buy and build properties across the US in 10 states and 16 metros portfolio is about a billion dollars. And we are agnostic to any particular asset class, but the largest portion of the portfolio currently is multifamily. both new construction and value add

J Darrin Gross 4:25

Got it. And you said to agnostic, have you how far have you strayed from the multifamily?

Neal Bawa 4:35

In my mind very far and sometimes people don’t quite get this so you know, I’ve I’ve done townhomes for sale. I’ve done for plexes for sale I’ve done for plexes for rent, I’ve done built around communities, which are very different from a standard multifamily community have done other asset classes like industrial self storage, student housing, and I’m still missing one or two

J Darrin Gross 5:00

All right. Well, it’s it’s I think it’s, you know, good to kind of test the other stuff there and and get a feel for how they play and and get to know those different asset classes. That’s great.

Neal Bawa 5:13

Yes. So I certainly don’t suffer from the grass is greener on the other side problem?

J Darrin Gross 5:18

Yeah, you’re, you’re mowing on both sides, I get it. So, Neal, it’s been a little while since we last spoke, you’ve been very kind with your time and coming on the program here, multiple times. And I think the last time we talked this, probably about a year ago, when when we were kind of working through COVID, things were still good, there was kind of the sense that the Fed was working to slow inflation. And there, the expectation was the interest rates were going to be pushed upward. And that that the fear was there was going to be a crash. And here we are, today, we’re we are recording this in February of 2023. We’re clearly feeling the effects of or the interest rates have been pushed up. And inflation has not necessarily been is not under control just yet. The fear of of, you know, a looming recession is still, you know, evidence. And there’s plenty of evidence of that. I mean, and so I guess my my first question to you is, is the the landscape sits before us right now? What is your just immediate sense of things, just with respect to the multifamily marketplace?

Neal Bawa 6:55

What I would say is that the market is not doing a very good job of adjusting to its new reality. So I feel like there is this sense of, you know, we’ve had goods for so long, right, the last eight years have been so good. And every time something bad happens, something changes it, like, for example, COVID was actually a very positive change for the multifamily industry, just when we felt like all the cash flow is getting squeezed out. COVID comes along, and then the Fed, you know, showers all this money and interest rates go to zero. And you know, it’s party time again, actually, the biggest party of all time, and multifamily was in 2021. And so something always comes along and Bails us out. But I feel like there’s no evidence at this point that there is something that is going to bail out the industry. But I still see too much of a party like atmosphere, I don’t see acknowledgement, either of the fact that today, you can’t really buy a value add property with significant cash flow, I mean, 1% 2%, you know, sure, technically, that’s cash flow. But I think that if your property is producing four or 5% cash flow, you’re probably being a little aggressive with your underwriting, because I don’t think that that actually exists. And so when you’re in a situation where you’re buying, you’re a cash flow industry, you’re a cash flow asset class, and you’re cash flowing at one or 2%, or 3%. And 40%, of all buildings purchased in the last four years, are either just breaking even or bleeding, then the sort of attitudes that I see in podcasts and conferences, needs to be adjusted. So my answer to Darren is, the industry is in a process of adjustment and not doing a very good job so far.

J Darrin Gross 8:46

Yeah, no, I have my own mind, I’ve kind of thought that it’s, it’s that transition phase between where we were, and the expectations that things are going to go back, or the kind of the reality, you know, where we really are, and that change in reality. And I think the only thing that, that that, you know, cures at his time, you know, it takes time for people to realize the marketplace to realize that what was is not anymore. This is the new reality. And

Neal Bawa 9:24

Well, I think what helps is having open discussions, because there’s people that are going to listen to this podcast that I think will have a slightly changed point point of view. If there were 90 people or 200 people on 200 podcasts having this conversation, then that pivot to reality would just go faster. It takes time. Yes, but it you know, that takes less time. And I think that that’s why having these kinds of conversations is even more critical than the sort of conversations that we’ve been having on this podcast for the last two or three or four years.

J Darrin Gross 9:55

Ya know, and I wonder to this Does the conversation and the reality accelerate as the the financing that one has in place expires and has to reset? And does that not necessarily, you know, either force a sale or force a refinance or kind of that recalibration happens when we’ve just come out of some very low interest rate terms, those who were looking to refinance probably locked in and a pretty good, pretty good rate. They’ve got some runway to work with. But those that are, are coming up on an expiring term, or you know, are looking to sell or have to refinance. They’re facing a different reality. And wondering if if your thoughts on on as they transfer or transfer, you know, go through that, that transfer. If that doesn’t kind of cement for more people that the new route, what the new reality is,

Neal Bawa 10:58

It’s beginning to cement it. The problem is there’s no education around what to do. Right. So I have yet to see a course. And you know, most indicators today did not go through a college education course, they didn’t go to Utah University’s real estate program. They basically went to a weekend course or a five day course and then signed up for some kind of mentorship and they became syndicators. That’s the standard path, right? So you look at that, and you look at the curriculums of all the gurus and it’s good. I mean, the stuff that’s being taught there, you know, underwriting stuff like that, what to look for in property, excellent stuff. But there’s never any chapter on what happens when debt takes your property underwater, because that scenario really didn’t exist for the last eight years. So nobody ever wrote a chapter. Nobody ever recorded a podcast, nobody ever had a conference session on it. And so the problem isn’t that people don’t understand the issue. The problem is that there are very simple, straightforward, somewhat painful fixes that people are not aware of, because no one has ever provided any kind of education. And this isn’t necessarily true of, you know, people speaking at the NMHC conference, because those folks have gone through 2008. And they understand what what are the things that they need to do? But but the syndication industry, the vast majority of us were doing this, including myself, in 2008 2009 2010. Right? Luckily, in my case, I had a property where I got education, forced education, and but I look at what people are doing today. And I tell them, you know, look, the problem isn’t just what Darren described. So what you described is, there’s a bunch of properties that basically have to be refinanced and made refinance, all of a sudden those properties will go from either breaking even or making some money to just losing money. $50,000 $100,000 a month. Yes, that’s the case. But let’s talk about what is already happening. And that’s, that’s, that’s what I really want to focus on. So if you bought, let’s say you’re a regular syndicator, you know, you have a regular portfolio you like most of us believe that bridge loans or floating loans are better than, you know, being locked into a loan for 10 years, right, nine out of 10, syndicators, were using some kind of floating debt, because they wanted access to, you know, extra money from the bank for rehabbing their property. So you’re like us? Well, then, in the last three years, 2020 2021 and 2022, and maybe a little bit in 2023, these three years, let’s say you bought 10 properties. So your average syndicator buys 10 properties, right? I think what’s not obvious in the industry is that three or possibly four of those properties are already underwater, because they already had these floating loans. And these four floating loans went up, they hit their cap, some of them didn’t have a rate cap, so they’re still going up. And the ones that have hit the rate cap, the rate caps usually been set to like 8%, or something like that. And so at, so they’re at the rate cap there, they’re still the rate cap companies helping them with their mortgage payment. But still, their portion of mortgage payment means they’re still illiquid now. Then there’s the bigger problem. Banks are realizing that your rate cap may be expiring sometime next year, let’s say it’s, or this year, maybe it’s maybe it’s August, this year, October this year. So guess what more and more banks are doing at this point, Darrin, they’re calling you and saying, Hey, we’re seeing that that rate cap is going to cost you about $700,000 When you get it and we require you to get that rate cap in October, unless you’re selling your property. And even if you’re selling your property, even if you have plans to sell your property, look, we can’t do anything about this. We want you to start escrowing, 50 to $70,000 a month for you to buy that rate cap when it comes up in October or August. And so now all of a sudden, you are bleeding already. And now you’re bleeding because you have to put another $50,000 in and we’re not at the peak yet because I at this point, it’s pretty much guaranteed that the Fed will raise interest rates once in March once in May and once in June. So there’s still another point seven five increase He’s. So if you have a $20 million loan point seven 5% is basically $150,000 more a year in interest, which is $12,000 more a month. So guess what’s going to happen? In July, you’re going to be bleeding $12,000, more than you’re bleeding today. But today, if you’re putting that bleed in from your pocket, imagine how you’re going to feel putting in an additional $12,000 a month in July. And you might say, Yeah, but it’ll get better. Here’s the problem. Nobody has spreadsheets on this, I’m looking to create the industry’s first spreadsheet on actually showing syndicators, what their cash flow will look like in the next 24 months based on their own projections based on their own assumptions. I’m telling you that property, if it’s bleeding $100,000 today, and it’s going to be 120 $12,000, in July, is still going to be bleeding $100,000.09 months later, does that mean it needs a million dollars of cash? And that understanding of what to do when you have this kind of situation is completely missing? That’s the problem. You know, you asked this question on your app. Sorry, I’ll get back to you. But you asked this question about risk, right. The number one risk today is not interest rates, and it’s not inflation. The number one risk today is complacency.

J Darrin Gross 16:19

Yeah, no, I think that that’s, that is, you know, you’re spot on. And in the end, I think it’s a necessity that changes the mindset, and you know, the action, or it creates the action. And until you have that, if if, you know, people keep thinking they’re gonna hang on, or they’re going to be able to or things are going to change? Are they telling their investors that, you know, we’re, you know, we’re expecting this to change here? And in the third quarter are mean, how are they? How are they positioning that because eventually there’s, there’s going to be a change, either they either, you know, they lose the property, the the interest rates do do go down, and they’re able to refinance out of it? Or, or, or what else can they do?

Neal Bawa 17:09

It will be very useful if you’re saying those things to investors that interest rates may go down for you to actually project it. So one of the things that we do, and we give this out to anybody that wants it, by the way, we create something called the Grow capitalist interest rate tracker, and it tracks all of the usual stuff. So you know, where Sofer where spreads? You know, where’s the overall number, which is so far plus the spread? Where do we think the inflation is going to be in the next 12 months? Where do you think the Feds gonna be? The truth is, whether you’re Goldman Sachs or Merrill Lynch, or you know, you’re one of the big guys, if you read their stuff, everybody thinks the Fed might cut by 25 basis points, or 50 basis points sometime in November or in December. And if you’re lucky, it might be 25 basis points in November and 25 basis points in December. How much is that going to help you that property? That’s cat that’s bleeding? $100,000, that’s going to be bleeding $112,000, in June or July? Well, that’s still going to be bleeding by $88,000. If those that half point reduction did happen. So in January, how is your situation going to be a lot better than it is in July? Right? And, and then July, August, September, October will all look the same, they will all look more painful? And so my big question is, how can you stay with a straight face to your investors, that things are going to get better with existing properties? When the most basic math and you know you’re a syndicator? You do very complex math and do it quite well. So clearly, you don’t have any shortage of math people. Why? How do you say this? How do you say it with a straight face? I think it’s absurd. And I think that everyone has these properties. I’m one that’s very straightforward saying I have these properties. There’s nothing that I did that in any way changed. My problem, that problem that I’m describing. What I’m saying, though, is I’m extremely proactive, on buffering up cashflow for my properties, extremely proactive, raising more equity, getting more loans, doing everything that’s needed. Because, you know, and I have a monthly meeting with my team. We don’t talk about anything else. We don’t talk about the property. We don’t talk about asset management, we just talk about this property stability. And every month, we open a spreadsheet, we play with it, we tweak it based on what our beliefs are at that point, right of where interest rates are going to be over the next 18 months. And how this property is liquidity is going to get affected if you’re not doing that religiously. And by the way, we were doing it weekly. Eventually you get to the point where monthly is fine. If you’re not doing this, it’s your job right now, for God’s sake to be doing this with an existing property. And here you are underwriting 30 new properties every week, making three offers a week and buying a property every three months and that property has the same exact problem.

J Darrin Gross 19:56

Let me ask you this because you’re the as a data scientist here, the the data that you’ve been kind of referring to and a lot of the syndicators that, that are, you know, relatively new to this asset class, I mean, you know, the 2008 crash created an opportunity for a lot of people to get in and get get some, you know, properties that were that were in distress. And so, if you are looking at your, your current properties and trying to bolster them so that you can, you know, make it through this situation here. Are you looking to other historical points, where the interest rates and you know, the, the investment environment was similar? Or are you basically just taking your, your, what you have now, and seeing what you can do to to, to bolster your, you know, your position so that you can make it through?

Neal Bawa 20:59

Um, it’s a good question, I think it’s a very good question. As I think about it, the answer is, we don’t need to go back and look at history. 2008 was extremely unusual, it was a worldwide equity crash, a worldwide liquidity crash. We have no liquidity problems in the US economy today of any kind that I can think about. There’s massive amounts of debt and massive amounts of equity available, everybody wants to lend everybody wants to invest. The problem is that the interest rates are so high, that you basically effectively can’t make a property cash flow, if you invest, if you put that into it, if you put equity into it. So the our situation is vastly superior to 2009. The problem is complacency. And the problem is because like, you know, I asked this question, I’m gonna not gonna mention names. But a recent conference conference, you know, somebody called the conference, I said, Where’s your sessions on teaching people about all this stuff? Cash calls? recapitalizations, you know, bargaining with lenders? What are the things you say to your investors? You need to be teaching people how to do this, because this is what they need to know. And they said, Yeah, but there’s no distress right now. And my question is, you realize your conference is only held once in a year 12 months from now will be too late to teach people. Because the distress basically effectively starts this quarter. And you might say, why this quarter? Well, the answer is, when did interest rates go up? Right. So you know, in March, it was a quarter point increase, nobody cares. In May, it was a half point, nobody cares. And then after that, we have 475 basis point bombs, right, going to October, and then a 50. basis point bomb in December. So three and a half basis point increases happened in the second half of last year. Well, how could there be distressed in the second half of last year, interest rates were still going up. Now they’ve gotten up to the point where in January, you’re like, Oh, my God, I’m noticing losing a lot of money. And but you have reserves, you can put some money and you can raise some equity. So no distress, q2, same thing will happen. You know, we will put more money in the won’t be any distress, you’ll push something back, you’ll take money from your rehab reserves to three now you’re getting seriously worried because you’re like, Man, this thing gets keeps getting worse. By q4. The whole industry is like, oh my god, bad stuff is happening in q1, I think next year is the peak of when properties are going back to the bank. So if you’re having a conference in February next year, who are you going to help?

J Darrin Gross 23:33

Yeah. Right. The new buyers of the properties have gotten off.

Neal Bawa 23:38

Right. So I mean, I think that’s what’s what it is. I think the distress takes such a long time, because there’s so many steps in the process. But why are there no podcasts about cash calls recapitalisation bank management? What are the sort of things that you can do with banks, and I’m not saying I’m an expert at this, I’m saying I need that education just as much as the next guy. I’m just aware of the problem. And the fact that it’s the next 12 months, not the previous 12 months, all the stuff that’s indicators have been saying about the pain in the last 12 months. There isn’t any pain, all of the pain 100% of it starts now and goes for the next 18 months.

J Darrin Gross 24:18

Right. Right. Now. And again, I think you’re you’re spot on with the in the sense that I think today that at least my experience has been that people keep looking backwards with the expectation they’re going to be able to recognize what’s coming. And to your point is none of the syndicators that are of have no right now I’ve been through that. So how are they going to be of any value for the coming year on on how to weather the storm and how to not lose a property?

Neal Bawa 24:48

Right. And people people have been saying, I said this in a podcast last month and people are like, Why are you saying it Neil? You should just be hiding it and waiting for these people to make mistakes and pick up their properties. No, you don’t really realize I won’t be able to buy their properties in q1 next year if there’s contagion in the industry, because banks will stop lending right now. No, every bank wants to lend, right? They don’t want to lend a 70%, LTV, they want to lend a 55%. Because, you know, the DSCR is the numbers that they care about are not working, right. But otherwise, every bank wants to lend on every project. Well, what if there’s hundreds and hundreds of properties returning to the bank in q1 next year, which bank will be ready to lend to me? How is that going to be helpful to me, as an industry, we either figure out how to get over this bump in the road, because that’s really what it is. By understanding, recognizing and getting stopped for God’s sake buying properties at this point, just focus on the existing ones, so they don’t go back to the bank. That’s all they have to do. This is our job is maybe 1/10 As hard as 2009. But why aren’t we doing it? Why aren’t we having those conversations? Why aren’t you having people actively say, Hey, we’ve got to be talking about this stuff. And let’s get some education. Let’s figure out how to be better. Let’s start calling every frickin lender in the industry and saying give us six months of deferment. You did that as soon as COVID happened, where why aren’t you making those phone calls now?

J Darrin Gross 26:14

It you know, I’m curious. Do you think any of this part or maybe part of the reason why there’s not this conversation and education occurring is that most of the syndicators I mean, the the the business plan is to, you know, buy the property, renovate and sell. And her I guess rented higher ed, you know, get the get the NOI up and then exit. But But how many of the the syndicators business plan really has a whole plan with an operation to weather a storm.

Neal Bawa 26:54

I don’t think that these plans were ever built, because they were unnecessary in the last six or seven years. You know, here’s my plan on my existing properties. Make sure my investors don’t lose money. If I promised you 17 IRR. I’m sorry, that’s not my plan. If I promised you 8% cash flow, I’m sorry, that’s not my plan. Something happened that no one in the industry, not Goldman Sachs, not the Fed itself predicted a massive bomb went off. My focus right now is I want to make sure that I don’t lose your money. That is my only business plan. And if I don’t lose your money for the next 18 months, then I’ll go try and recover whatever portions of the business plan I could on a property by property basis. Don’t think about it 18 months from now?

J Darrin Gross 27:45

No, no, I think that honesty and having that frank conversation with investors, it may not be what they want to hear right now. But, you know, as we get through this, and when they get to the end of it, if you’re successful in, you know, able to do that, you will attract a whole bunch more investors from the standpoint of, you know, the, the honest, reality based conversation that was occurring with your investors, and I think that would, that’ll that’ll bode well, well, I

Neal Bawa 28:21

hope so. Because I think that that’s what is needed today, I obviously have to give up buying buildings today, I can buy buildings, you know, everyone sends emails out saying you buildings are $20,000 a door cheaper right now. $40,000 a door, I’ve got a huge deal compared to 12 months ago, when this building was $40,000 a door more? Well, you’re probably neglecting to mention that you were you know, underwriting you know, 4% interest rates a year ago, and now you’re underwriting at seven or eight or nine or even 10. Right, so that part of it is rarely mentioned. And so, I mean, I look at how I can get pencils up because I desperately want to be pencils up I haven’t been pencils up for a while. And every time I pick up my pencil, I look at data and I put the damn pencil down again.

J Darrin Gross 29:12

Yeah. In let me ask you so the you know, the the Fed sets the interest rates were they kind of the the overnight rate for banks and and, and, you know, as long as I can remember I think was Alan Greenspan back when he was kind of the first Fed chairman of note that really pushed the lower rates and in so it’s been 2020 plus years that we’ve had lower interest rates. But, but as we settle into kind of, like I see settle into, I don’t know if it’s gonna settle but I’ve heard conversations both on both sides or, you know, trying to express it both ways. Do you think that the, you know, if the market plays out like you, you’ve suggested here and that first quarter of 24 properties gone back? Naturally, you would assume that the Fed will then have to do something to kind of, you know, Goose the, the the market, do you think that the interest rates will go down because of that? Or, or do you think they’ll try and hang on to as much rain as they can?

Neal Bawa 30:32

No, I don’t think the Fed will do anything at all to help when the when this occurs, because I want to just explain the size of what will happen 1000s of properties could go back to the bank in q4 this year and q1 next year, q2 next year, right. Please understand the size of the multifamily industry. The syndication industry itself is a very small portion of the multifamily industry, people have been buying multifamily for generations there lots of people that don’t even sell them, they hold on to them for decades. And then there’s the institutional guys that are buying multifamily with hard loans and 10 year fixed loans, and they’re just laughing at the rest of us saying, hey, my property, I’ve owned it for 10 years, it’s got another 10 year fixed loan. So as a portion of the multifamily industry, the syndication industry is fairly small, and as a portion of the syndication industry, that properties that are actually going to be distressed enough to go back to the bank, that’s still very small. And then multifamily itself is a small component of the overall real estate industry, the single family industry is larger. And then the real estate industry is only a small component of the economy. In 2008, it wasn’t a real estate crash, all liquidity dried up in every single part of the economy. So compared to what happened in 2008, what could happen and may not happen, right? I could be wrong, and there may not be that distress next year. But let’s say that there is distressed, we’re looking at dollar numbers that are maybe 1% of what the Fed had to deal with in 2008. Why would they change track, when bad stuff happens in the economy all the time, the Fed didn’t change track when when Twitter laid off, you know, 7000 people or when Facebook laid off 11,000 people, the Fed actually pointed out to people that unemployment in the tech sector has risen in the last four months, even though big companies are laying laying off people, the small ones are hiring them, because they didn’t have access to those people before. So point is, the Fed doesn’t really react to things the way that the market would like them to react, they look at the economy as an overall picture. And within that, if there’s a sector that’s distressed, they’re not going to jump in to help that sector easily.

J Darrin Gross 32:34

Yeah, that’s interesting, as you kind of lay that out, you know, just thinking back about the oh eight. And how big that was. I mean, it wasn’t just, you know, commercial real estate, but, you know, all real

Neal Bawa 32:47

thing. The entire economy was in severe distress because of a complete lack of trust, complete lack of liquidity. We don’t see anything like that today. They just, I don’t see a scenario in which there’s a Fed chairman, that’s going to vote to start dropping interest rates to help 1000 multifamily properties in a in a country that has millions of them.

J Darrin Gross 33:08

Right, right. Do you think this could potentially, you know, reduce this, the the numbers of syndicators just based on, you know, the sexy investment of real estate, non performing, as well,

Neal Bawa 33:26

as there’s 100% chance that there’s going to be less indicators 18 months from now than they are today, there’s 100% chance. The problem is these people don’t know how to speak to their investors. So there’s still people doing sessions where they don’t talk about this stuff. And I’m actually, I’m guilty of that too, myself, right. But I’m planning over the next three months, I feel like I’ve done enough to make sure that my properties are not going back to the bank. But I feel like I need to do more sessions with my investors and just have these straight, toxic straight conversations with them about what’s happening in the marketplace, and how it’s affecting them. I think this stuff is important. And I really don’t feel I lose investors that way. They may not give me money for a property three months or six months from now. But I think that there’s appreciation that I’m right now, pencils down, I’m not looking to buy properties. I’m not looking to my I have staff on payroll that I’m paying from my own pocket, because you know, I’m not buying new properties just focused on their money, because they gave me that money. So I think that if, unless that happens in the syndication industry, I predict that there’s going to be a lot a lot less indicators. I mean, you already see brokers in the US single family brokers have dropped by about 30%. In just the last six months. The bottom dwellers just couldn’t take the fact that homes were not selling. And they went and did something else. Right. The job markets good. They got other jobs. I think we lose. I’m speculating maybe 20 to 40% of the entire syndication industry in the next 18 months. Yeah. Now and again, this isn’t this isn’t blood on the streets, right? There’s at no point have anything that I said represents Blood on the street, it just represents distress for individual properties.

J Darrin Gross 35:06

Right, right. Now just deal by deal challenge as opposed to a systemic.

Neal Bawa 35:14

You know, I don’t see a systemic problem, I do see that if 1000s of properties do go back to the bank 2024 2023, maybe or next year, 2024 may be a difficult year, especially early on in the year to get lending, where the banks are, if they’re worried about properties on their books coming back into them, it’s harder for them to lend at that point of time, because they have to deal with those properties. Today, slow down,

J Darrin Gross 35:38

right? I’m just sitting here thinking is you’re talking about the, you know, the lending environment, and just kind of this education that you’re working now, with your investors, it would seem that part of that education be kind of just more about the cycle, you know, the market cycle itself, and where the opportunities, you know, potentially will come from, or when they will come. And, you know, if you are able to weather the storm, and investors are wanting to get back in or have additional capital they want to put to you to use that that would be kind of the point for them to jump in or for you to go forward. But I’m kind of curious to on just the psychology with investors, you know, if they’re, you know, the aversion to loss, you know, the fear of losing, is so strong. And if they’re in the mindset of where if that’s what this week, your investors are, the hope is that you’re like you said, you’re able to, to not lose their their investment. So let’s say you’re successful in that, and you’re having a good conversation with them. And they feel educated and they feel taken care of by Neil. And as the cycle presents itself, there’s all these other additional properties that are that are turned back to the bank. Do you think you’ll you’ll I mean, I would assume you’ll be in a better position to raise capital from those people hand or anybody else? I mean, the I guess the the flip side is that people that lose money in the deals from the syndicators that aren’t having this conversation that are turning the deals, they’re not going to have the capital nor they’re going to want to get get back in the market, I would assume is that,

Neal Bawa 37:26

Yeah, it’s not read necessarily a good story, right? So 18 months from now, my job actually will be harder to raise money than it is today. Because those investors in my properties or other properties, haven’t seen this play out publicly. At this point of time, as I said, when I go to conferences, tell people, where’s the session on training on this? And they say, well, there’s not enough to stress Yes, for us to be doing this stuff. So stuff is in our future. And because it’s in our future, I think that 18 months from now, there’ll be investors who a have been burned, you know, with the property going back to the bank, or, you know, having to put in cash, or be they’ve been with somebody like me, and, you know, work hard, and maybe our properties are, are skating through this challenge, but they’re still not making money. I mean, I’m even for properties where I’m when I’m quite profitable, just out of an abundance of caution. I’ve told them, I’m sorry, I’m not distributing any cash, I need to just build my operating reserves, it’s your money, it’s not mine. If I don’t use it, it’s yours. I’ll, I’ll distribute it to you. Right. So since it’s not like, I’m going to sit and eat this money, it’s going to go into a bank account, it’s going to sit there for a while, sorry, but that’s what I have to do. Because my job is to manage your money. And know I see potential risks. And if that risk goes away, you’ll get your money. So so there’s people even in my database that are not particularly not happy with Neil Bauer, because they’re like, you know, I’ve this property is doing well, by now, you know, you kind of delayed cash flow during COVID. And then the cash flow came back, and now you’re taking it away from me again, I’m not quite happy. I think they understand. But they’re grumpy about it. And I think so, raising money next year is not going to be easier simply because other syndicators have burned investors. I think there’s a process where the mindset resets 2024 We’ll just muddle through 2025 I think is going to be a fine year. And we’ll do well. You know, you said Alan Greenspan was really the first guy that advocated for lower interest rates. I believe all Fed chairman in the future will advocate for lower interest rates simply because it’s okay for the US to have these high interest rates for one year, maybe even a year and a half. It’s no big deal. We’re a very strong economy. But what Imagine if interest rates were this high for the next 10 years? Do you know what that does to the interest payment on the federal debt? I mean, you have to cut every program, you have to cut military you have to cut Social Security, you have to cut, you know, job entitlement programs or unemployment. Everything’s got to be cut because you’re basically spending $300 billion extra that you weren’t paying thing before. So the political pressure from both Republicans and Democrats to keep interest rates low in the long run is extraordinary. In the short run everyone’s understanding of what the Feds doing, they understand that inflation can prevent them from being elected at the next election. So they’re like, Yeah, go ahead, do your job. Once inflation comes down to a reasonable level, there’s going to be a lot of pressure.

J Darrin Gross 40:21

Yeah. No, I definitely. It’s a interesting dynamic with the Fed. And, and, you know, have some scary times ahead of us. But I think that, you know, the wise syndicators and, you know, investors that understand the situation, the the, you know, preventing a loss is really kind of prevented, you know, prevent defense or whatever, trying to try to prevent losing is really kind of the game right now.

Neal Bawa 40:52

Yeah, and it’s not that hard, right. So if I wanted to sum this whole thing out, I don’t want to use the word scary, because I don’t think it’s scary. I think it’s just neglect. People are just not thinking about this, because they’re like, you know, it’ll get better. No, take a spreadsheet, plan out the next 18 months, and be reasonable, when you think how interest rates are going to fall, and how it’s going to reasonably affect your property, figure out how many dollars you need, and put together a plan, it’s not as many dollars as you think. You just need to look at it. Now. It’s going to be a lot harder a year from now. So you might as well look at it now. So I think this is really all about action there and not panic.

J Darrin Gross 41:32

That’s good. Hey, Neil, if we could like shift gears here for a second, but damn an insurance broker, and to have such worth my clients to assess risk, and try and determine what to do with the risk. And the three strategies we typically consider our first look to see if we can avoid the risk. When that’s not an option, we’ll see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize risk. We look to transfer the risk and that’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation, could be political interest rates, the Fed clients, investors, tenants, however you want to frame the question for the answer for you. But, you know, I’d like ask you Neal Bawa, what is the Biggest Risk?

Neal Bawa 42:30

The biggest Risk is to keep doing what you were doing before. Right now we are at a point where we need to pivot. So you know, you name three things. And so I’ll go through those three and tie them back to the biggest risk. This change right now may not be a good time to buy multifamily. In fact, I don’t want to buy multifamily until about July this year, when something known as the spread, which is a portion above Sofer is likely to to drop it might even just collapse. So I basically want to wait until that time in terms of transferring risk. Yeah, I want to go out and have my distressed fund by not buy properties, but invest money into properties. Because when I invest money into properties that are that are distressed right now have negative cashflow. I’m doing what Darren mentioned, I’m transferring my the risk from my investors to the existing investors of that property. So if they change their mind would allow me to come in as preferential money. I’m coming in ahead of them. And I’m transferring the risk of ownership of the property while I’m getting ownership of it to someone else. It’s somebody else’s risk is the GP and the LPS risk, not my LPs, their LPs. So if I can transfer risk successfully, I’m looking to do it by recapitalizing existing properties that I like nothing wrong with the property, just the interest rates are killing it. One day, the interest rates will go away and the property will do well, again, I want to own this property, but I don’t want to buy it from the market because I think that the price is too high. So when I recapitalize somebody else’s property and put my investors in pole position and transfer the risk.

J Darrin Gross 44:12

That’s an interesting strategy there. Are you finding lots of opportunities that way?

Neal Bawa 44:18

One a day early. That’s, that’s remember the distresses there. Everyone’s ashamed to talk about it.

J Darrin Gross 44:26

Right. Now, that’s, that’s, that’s good stuff. And you’re able to with your investors come in and establish a position and put some capital in and I’m

Neal Bawa 44:42

Looking to do so as I as I said in my commentary, that the peak of the distress starts in q3 this year. So right now it’s time for conversations, understanding those properties, seeing, you know what they’re doing, we’re encouraging them to do cash calls first before they recapitalize. You know, cash because if they can get by with cash calls good for them, I mean, that’s the easiest way that that’s what they should be doing. So we’re providing education at this point of time. But there may be properties where the cash calls are not successful, and they come back to us, they’ve checked off that box. And then their investors are ready for a, you know, change in their position in the equity stack, after an unsuccessful cash flow. So it’s a process. I haven’t done any yet. I’ve got, you know, two dozen properties that I’ve looked at, I think I like four. And I’m monitoring those four to see what happens in the coming months. And I’m also having conversations with my investors. This, you know, I shouldn’t be recapping any property at this point, but six months from now is different.

J Darrin Gross 45:42

Well, I have an interesting conversation for later to hear. Are you? Are you done? That sounds good?

Neal Bawa 45:48

Sure. There’s, there’s more opportunity at a time of distress, not less.

J Darrin Gross 45:53

Yeah, no, absolutely. It’s the old Warren Buffett there, you get a chance to use homeruns shorts on this kind of thing. So I like it. Hey, Neal, where can listeners go if they’d like to learn more connect with you?

Neal Bawa 46:06

Two different ways. One, I’m the only Neal Bawa on the World Wide Web. So you can just type in N e al space B Awa and hit Enter on Google and you’ll find my content and connections to me. The other one which is more formal. We have about 50 75,000 people that are current subscribers of multifamily University, the web URL is multifamily followed by you that letter U so MultifamilyU.com. We do webinars each month on these kinds of thorny topics that no one else wants to touch. We do about 20 of them a year. We just did one we had 2600 people registered about 1200 watched it live. So those kinds of events. I don’t have a podcast so you can’t listen to one but I have been on over 200 podcasts so you can go to pod chaser.com and search for my name and you’ll find a couple 100 of them.

J Darrin Gross 47:00

Awesome. Well, Neal Bawa, I cannot say thanks enough for taking the time to talk. I always enjoyed, learn a lot, and I look forward to doing it again soon.

Neal Bawa 47:11

Awesome. Thanks for having me back Darrin.

J Darrin Gross 47:13

Unknown Speaker 47:32

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Multifamily Recession Investing with Anna Kelley – CRE PN #406

Anna Kelley 0:00

And so when we hit the peak, because when money is cheap asset values go up, if you can borrow more cheaply, you can afford a bigger house and you know, a nicer lower payment, and you’re going to go buy and invest in more things that you’re going to try to generate a return. Well, that created this asset bubble. And when values started to come down a little bit, and these loans start to reset, it became evident that many people were going to walk away from their properties upside down and declare bankruptcy. And when that happened, essentially, all of the financial institutions booked asset values went down, their ratings declined. And they many of them, you know, as you know, went under so I think there’s a lot to learn from that. The mortgage world got tighter and better. So the loans issued since then have been much more stable, fixed loans, higher credit quality, so we’re better there. But the variable debt in the commercial real estate world and the commercial lending world, I think, is still a lesson that we haven’t learned, and it could cause some future pain as well.

Announcer 1:07

J Darrin Gross 1:27

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today, my guest is Anna Kelley. Ana is a former top ranked financial relationship manager for Bank of America’s private bank. She also worked for AIG for 20 years in the corporate and affluent Markets Group focused on creating products for ultra high net worth individuals, banks and institutions. Anna has been investing in real estate since 1998, and has held active ownership of a rental portfolio valued at $300 million across Texas, Pennsylvania, Florida, Tennessee and Maryland. As a sponsor, Anna seeks strong multifamily investment opportunities to help her partners and investors meet their financial goals and grow wealth on a tax preferred basis. She brings her decades of experience with both traditional investments and real estate to help others overcome fears, increase knowledge, mitigate risk, and make wise investments in real estate. Anna is passionate about creating a meaningful impact in the lives of her residence and communities. And is also a sought after speaker real estate coach and a four times Amazon number one best selling author. And in just a minute, we’re gonna speak with Anna about real estate investing through market cycles.

But first a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how attractive our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest Anna Kelley, welcome to C R E PN Radio.

Anna Kelley 4:10

Thank you so much Darrin, it’s so great to be here with you today.

J Darrin Gross 4:13

I’m I’m delighted to have you and looking forward to our conversation. I gave kind of a little bit of your background there. But I’m curious if you could share any insight with listeners. Take a minute and share a little bit more insight with listeners.

Anna Kelley 4:30

Sure, so one of the things that makes me a little different than maybe some people that you’ll hear on on commercial real estate is I really didn’t get started investing in real estate. I started my career out in the financial world in the institutional investing world. And I realized very quickly working with ultra high net worth investors that if you have a lot of money to begin with, it’s pretty easy to find investments to grow your wealth pretty rapidly. As long as we’re in an upward economic cycle, but if you really don’t start with wealth, it takes a very long time to grow wealth in the traditional investing arena, investing in your 401 K and stocks, bonds and mutual funds. And so I recognized that I didn’t want to have to wait until I was 65, to create a million dollar net worth and to live on $40,000 A year after that. And so I had a very wealthy client, who, when we mentioned back in the late 90s, that we could get him a CD at about 8%, he laughed at me and said, Honey, I make way more than that on my real estate investments. And I realized that in all my training in the financial world, and investment advisory classes, and all of that, I never learned anything about real estate. And so it piqued my interest to say, I might want to check into this and see if there’s a way for me to grow wealth more rapidly through real estate. And that put me on a path of interest in real estate. But it wasn’t really until 2009, the great recession, when I worked for AIG, lost the majority of my 401 K and was told every week, we were probably losing our jobs, that I realized that, that putting my entire financial future in the hands of the stock market, retail investments, or a corporate job really wasn’t wise over the long term. And that’s what got me to really escalate my level of real estate investing to create financial freedom. And it’s the best thing that I ever did.

J Darrin Gross 6:35

Alright, I love it. Love the history there little backstory, and how you get started? You know, it’s funny, I just had coffee with a couple of investors, little Meetup group we do. And I’m based here in Portland, Oregon. And you mentioned that the, the, where you were in ’09, with AIG, and kind of the the sense of like, you know, are you going to be able to keep your job? I just learned this morning that Intel, the big chip manufacturer, has announced salary reductions for all of its workforce. And I think the front line is like 5%, management, maybe 10%. And if you’re vice president, it’s, you know, 20%. And I thought, wow, I mean, that’s, that’s not the head doesn’t necessarily jive with the, the inflation inflation, you know, you hear about wage increases is kind of the one of the things that that is, you know, hanging out there kind of thing. But yes. You know, on the flip side of that, I’m also talking with the guy who’s in sales, he said, sales are way down. So, you know, it does kind of offer an entree into kind of the the market cycle conversation I was hoping to have with you today. Absolutely. And I just kind of curious that, you know, if, if maybe the best place to start would be to maybe go back to kind of the oh nine, because that’s the most recent cratering of the market. What was what was in place at that time. And I think, you know, one of the one of the things that I’m a big believer in is that whatever the cause of it, was, has likely been tweaked. So that it won’t likely happen this time. But I think that people are looking for that, you know, like, oh, it’s gonna make everyone happy. But the reality is, is that, you know, where it comes from, isn’t always easy to identify. But the results are very similar. Right? And that, so maybe if we could go back and just kind of reset, you know, what was going on and in, you know, the capital markets, the job markets, and, you know, real estate back in the day, oh nine, and then kind of look, from there forward, and then see where we’re sitting right now, that sounds like a

Anna Kelley 9:08

Absolutely? Yeah, absolutely. I’ll say this. You know, one thing having been in, you know, really the elite areas of Bank of America and AIG and when I say that, we had a lot of information on every type of investment available to us, and where, where can we find the best returns? And how can we mitigate risk with those returns? Right, I worked at AIG. So we were in the business of creating returns and mitigating risks together as much as we could primarily through private placement, life insurance, where investors, banks institutions could park their money in just about any investment they wanted to as a private placement and put that within a life insurance policy so their wealth could grow tax free within that plan, or if you’d invested directly in a stock or you know, private place meant outside of insurance most of the time that that that’s taxable. And so, having had such great training and these, you know, increasing roles where we were looking at more and more products, I have to say, looking back that I was naive to think that I knew as much as I knew, I kind of figured if you understand investments, well, the risks are generally the same over time. And you can make a pretty informed decision based upon looking at history and looking at the things that are going well. And when I was really blindsided by, you know, late 2008, early 2009, completely blindsided by the collapse of the financial system and the real estate markets, I realized that you can know a lot about your chosen investment, whether that’s you know, multifamily, or the stock market, gold and silver, you name it. But if you don’t understand the forces that are happening in the economy that impact asset values, the impact your cash on cash return and your income, that impact interest rates, you can be blindsided, again, by anything that can disrupt asset values, interest rates, cheap debt, et cetera. So my biggest lesson from 2009 Was that it’s not good enough to know your one or two or three chosen niches, well, you really need to become a student of the economy and watch the macro economics, watch the real estate and the economic cycles and say, Are we in an expanding cycle? Is that expanding cycle likely to continue? Or other signs of it cracking and heading back down toward a decline or a recession? And what are those signs? How do we know how to recognize when things might be shifting so that we can understand that there might be new risks that could impact our returns, or even wipe out our retirement plans like, like, it happened to me in 2009. So I really didn’t study the economy at a high level before I only really studied specific investments and historical returns. So that was my biggest lesson. And since then, I’ve become a student of the economy. So I’m watch macro economics like a hawk. And I understand I watch rates, I watch what’s happening in the currency wars between countries in trade wars between countries, because all of those things, impact currency values, and ultimately impact how the Fed reacts to changes in potential global issues. Where before 2008, we really were mostly focused on national economic health. And we were focused on real estate as a major asset that had been increasing for such a long time, that I think we got lazy in the financial system. And we just assumed that things were going to continue to get better, the economy was going to be different this time it was going to continue to expand. And a lot of the signs that there was unhealth in the mortgage industry, and an asset values and in the collateral that was used, you know, for financial assets and derivatives and things like that. They assumed that things were going well, and they ignored all the negative news. So when I look back on 2008, and nine and say, How could all of these really smart, large financial institutions with well paid, you know, actuaries that mitigate risk? And you know, financial engineers that understand all this? How can all of us be so blindsided and in hindsight, you know, appear to be stupid and not know what we were doing? And the reality is that there were signs There were articles written, you know, starting in 2006, saying, beware there’s problems in the mortgage market, there’s there’s rougher worse debt worse, underwritten loans than what we think they are. And there’s way too much collateralization of that debt backing many, many, many obligations and and loans, and that if the bubble pops, things could collapse. And it did. So, you know, I think we’ve learned from that in terms of the some of the problems with the mortgage market that brought down the system was that rate, loans were easy, they were easy to get, you didn’t have to have a great credit score, you didn’t even have to prove your income. They had no dock loans, and they were filled, the economy was filled with those types of loans and variable rate interest loans where, you know, adjustable rate mortgages would reset. And so when we hit the peak, because when money is cheap asset values go up. If you can borrow more cheaply, you can afford a bigger house and you know, a nicer lower payment and you’re going to go buy and invest in more things that you’re going to try to generate a return Arne well, that created this asset bubble. And when value started to come down a little bit, and these loans start to reset, it became evident that many people were going to walk away from their properties upside down and declare bankruptcy. And when that happened, essentially, all of the financial institutions booked asset values went down, their ratings declined. And they many of them, you know, as you know, went under. So I think there’s a lot to learn from that. The mortgage world got tighter and better. So the loans issued since then have been much more stable, fixed loans, higher credit quality, so we’re better there. But the variable debt in the commercial real estate world and the commercial lending world, I think, is still a lesson that we haven’t learned. And it could cause some future pain as well.

J Darrin Gross 15:53

No, I appreciate you kind of going through that. Because, you know, that whole time with, you know, running up to, oh, 809, there were were, you know, the rates were so cheap and easy, or money was easy to get. And the fact that so many people have multiple properties or had very little skin in the game. You know, I think the the notion of, of Safe, safe loan or a safe investment from a lender perspective, lost sight of, you know, there’s no skin in the game, there’s no, you know, what’s the incentive to to make the payment? What’s the incentive to, you know, you know, keep the, you know, the home a roof over your head, right. And, you know, you know, the, the fact is, is that underwriting has tightened up significantly from then we just went through a huge wave of refinancing, where people have like locked in low interest rate, debt, fixed rate for for a long runway. But, you know, as you were saying that everything like Wayman, this is exactly what’s been playing out in the commercial here. The, you know, whether it be just in, in commercial real estate investors in general, or a whole, a, you know, crop of newer investors that found commercial real estate, that maybe just thought it was like, you know, like, oh, eight or, Oh, 607 in the residential, where you could decide to get a get a loan, you buy a fix that you sell, you buy a fix, you know, kind of that kind of thing, not to realize that or not, you know, having thought it through that, you know, what happens if, if I can’t sell it? What happens if the market changes? Right, How well am I prepared to weather the cycle? Right. And so, tell me a little bit I mean, your background and with your experience investing in a lot of the the oh, 809 crash? You mentioned it before here was the debt was not fixed, it was some sort of variable product with with less than capable buyers to absorb that change in the, the the loan. Right, you look, look at the commercial debt, and the way most commercial deals are, are structured. Do you see a parallel that’s playing out or that’s about to play out?

Anna Kelley 18:36

Absolutely, I do. And, you know, because I lost so much in 2009, really, we had started a business at the height of the economy in 2007, with a significant amount of debt. And so, you know, when when everything collapsed, not only did I have to, you know, provide for our family, but part of my salary went to cover my husband’s staff expenses, because he had a new business, and then I lost most of my 401k. So I never wanted to live through that again. And so I’ve been very, very conservative as a commercial real estate investor, you know, since 2009, with the types of debt that I take on because really, most people can survive a recession or even a financial crisis that last 10 months to a year and a half, which is about how long most of them last, if they can continue to cover their debt. So your debt payment as a percentage of what your income is, through all sources, is really the thing that you’ve got to be very careful of, and if you don’t know what that debt payments is going to be into the future, when you’re at the cusp of the end of an expansion period in the economy and starting to head downward really is what I see the greatest risk to all investors regardless of what type of debt you have and what that particular asset is so specific to multifamily. Right before things started to get really crazy, I’d say before the pandemic, and even through the middle of the pandemic, most multifamily investors, which is all I invest in actively, I’m passively invested in lots of other commercial real estate. But my active investments are buying and syndicating and operating large apartment complexes, these value add deals where we buy them at a good basis, and then we increase the value, increase the rents and sell them for a profit. Typically, that process is about three years. And so the great thing before the recession is most syndicators, were using Fannie and Freddie backed mortgages. And so we got, you know, five to 10 year fixed rate loans. And those that did do bridge that they only did it when they bought properties that couldn’t pencil with Fannie and Freddie. So bridge debt, temporary debt, that’s variable rate really always has some risk. But in an expanding economy, where you think things are just going to keep expanding over the next three years, rates won’t go up significantly, we’ll be able to roll that new debt, if we have to refi or if someone buys the asset from us, they can get a low rate mortgage, then it keeps you pretty comfortable that your asset values are going to keep going up, because of the fact that the economy is going up. Well, the pandemic kind of was the first major shock that said, Wait a second, now we have all these tenants that don’t have to pay, at least the media’s telling them that the government’s not going to make them pay. And now you’ve got debt that you have to maintain, even with potentially a 3040 50% cut in income. So I thought during that crisis, while we are in in big trouble, and we got through it, and we got through it really well, because we had cash reserves. And because we had a fixed debt payment, we did not use bridge debt. So after the pandemic, I became more resolute in my decision not to do deals with any kind of variable rate or bridge debt loans, because I had experienced the pain of that during the pandemic. But what happens is we quickly forget, you know, we had this pandemic, we had a recession, the the government stimulated the economy, we had all this excess cash, and rates, you know, came down and everybody says cheap money. Surely, we’re out of it, we’re back up into expansion, we’re not going down. If we can get through this, we can get through anything. And so they they bought more property values continued to push up in commercial real estate because of the cheap debt. And essentially, most syndicators, were using bridge debt. Now, instead of the Fannie Freddie that meaning they had a year, maybe two with an extension to get the renovations done, to sell the property for a high value or to refi. And they estimated that their mortgage payments would be about the same and rates would be about the same when they had to exit. And that’s where the real risk is today. Because as you know, and all of our listeners, if you’ve been watching the news at all, you can see that we’ve had mass inflation that that many people didn’t expect. And that’s caused the Fed to raise rates at the most aggressive rate since I was a child in the 1970s. And so when you don’t think that things could get worse, you make decisions based upon the assumption that things get better. I didn’t do that. And I don’t do bridge debt, because of those lessons I learned in oh nine, because of the fear that we wouldn’t be able to pay on mortgages during the pandemic, I said, my kind of foundational, you know, debt paradigm is that, generally speaking, I don’t do bridge debt unless I have many ways to mitigate the potential for the asset value to fall cap rates to rise interest rates to rise and need to be able to afford a much higher mortgage payment.

J Darrin Gross 23:52

Yeah, no, I, I, I like your, your thought process there on, you know, locking in the debt. And also, it just, it, it’s more about you being able to weather that whatever that cycle, whatever the future is, because, you know, as we’ve we’ve kind of alluded to, and kind of look back, things happen. And, you know, while it’s it’s popular to believe that it’s just everything’s gonna go up and up and up and up, there is a limit, even though a lot of people can’t see it. It’s kind of like on a roller coaster, you can’t see the the vertical or the drop until you’re right, all the way over the top there. Right. But that it sounds like that, that for you is kind of a rule of investing period is that lock in that debt and know that you can service the debt from now, till the till the end of the loan? There’s because I kind of,

Anna Kelley 24:52

I’d say yes, but there’s always exceptions to every rule, but if you make an exception, it shouldn’t then And quickly become the rule because it worked out once or twice, right. So there are situations and I’ll use right now, for example, now we’re at the point where commercial real estate values haven’t come down significantly, yet rates have gone up significantly, and lenders have cut quite significantly the loan to value they’ll actually give you for that debt. And so it’s much more expensive to buy properties today. And so, if I were to lock in a rate for 10 years today, when I believe that rates won’t be this high for 10 years that wants, you know, the Fed has been successful, hopefully, in killing inflation. And we have a little bit of softening in the economy, the hope is that they go back and reverse rates, I’d say in the next year, I don’t count on it till 2024. But if I think rates are going to come back down, you know, even a point or two or three, I might not want to lock a rate for 10 years today with a prepayment penalty, that could be pretty stuff, this might be one of those only periods when I say, because of how high rates are today, if I think that history is gonna repeat itself, and the Feds gonna lower rates within a year or two, or we have a deep crisis or a deep recession, that will definitely necessitate them cutting cutting rates, I might go ahead and take the risk of a variable loan, because it might be actually less risky today than a fixed loan with a multimillion dollar prepayment penalty. So I’m not going to do that on all of my deals. But if I find something with a strong enough basis, Darren, and I can hold enough cash reserves that I can whether a rate going up even more, you know, after a year, and that I have enough upside in that property to really create massive income to offset potential cap rate changes or interest rate changes, then I might do a variable loan or two today. And if it’s a development, which I do, then most of your loans are variable. So you just have to find different ways to mitigate that interest rate cap insurance, things like that.

J Darrin Gross 27:03

Right. And I’m just curious with the development, it seems like that’s almost it’s a, like an entirely different animal from like a value add, and a value add, you release, you know, whatever the income stream is. And I’m assuming that you’ve got a pretty good idea what the market can bear as far as additional rents in you’ve got a little bit fewer variables there. I mean, there’s still obviously a material supply chain kind of stuff that could happen and, and, you know, create a situation but development I mean, that that to me, is kind of the the original value add, starting from a piece of dirt to something that that you know, something that sell eventually or do you do you build whatever you’re developing to to keep buying all or you know, building hold, are you are you in your developments of is it more of a for for sale,

Anna Kelley 28:01

it is really more for a sale. But the great thing about multifamily development. And again, this is very regional specific, so I only invest in markets that have extremely strong resilient economies, with lots of new companies moving in lots of jobs, the things that are going to keep an area resilient, and where there’s really minimal supply for the demand of the population growth. So when you’re in that type of market, and you know that there is a lack of housing, that there’s going to be an extra three 510 1000 people within two or three years, then you can feel pretty good about what you can get for rents, how full you’ll be able to be. And so you know, we’re we’re building those for the upside. On the positive front, you know, we do hold a lot of reserves, and we have to because again, those those loans are a bit variable, and we don’t have income coming in to service that debt. You know, which which makes it a little bit tougher. But on the positive side, we really don’t have a lot of expenses either other than the building. And so if we raise enough money and have enough money to develop the project between our capital stack our equity, private equity lenders, you know, different kinds of, of lending programs that might give us credits and things of that nature, then we can pretty well bank on what our exits going to be. Now, with that said, a typical development project, we’re developing large apartment buildings, you know, 500 to 1600 unit complexes, they’re going to take two to three years to complete and fill. And so our exit is similar to a syndication about you I deal with three years. But if the economy doesn’t give us what we want, and this is what everybody doesn’t know the answer to is where is our economy really going? So we can tell that it’s on a downward trend, we’re probably likely in a recession or very close to and will be in 2013. But if the recession goes longer than the average of 10 months, and if the recovery lasts longer than the average of 18 months for recovery, rates were right close to that three year mark. And so the beauty of development is, you know, if you have the right economic fundamentals locally where that asset is really needed to provide housing and affordable housing for people, then if we had to at that point, we would refinance and keep the property and go into a Fannie or Freddie fixed rate product. Rather than sell it if the economy didn’t give us what we thought we would have yet. And upside. We can hold that asset for a few more years, and then sell it at the optimal time during an expansion period of the market cycle.

J Darrin Gross 30:35

Love the multiple exit strategies. That’s, that’s, that’s great. wants to touch her ask you about this. So that you mentioned kind of the normal duration of like the peak and the trough. I thought I heard you say 1018 months? It? Is there a time between the top and the bottom? That’s a normal cycle. I mean, that I was that seven, eight years was kind of the the, the timeline, but I don’t know that that’s necessarily the case.

Anna Kelley 31:10

Yeah, it’s really interesting. So I’ve studied this pretty extensively, going back to all the data that’s been available since about the 1930s. Multifamily data has come a long way, since about the 80s. So some of the data prior isn’t, isn’t great. But what I can say is that in a recession, in general, on average, since they’ve been tracking since the 1920s, the average recession lasts 10 months. Now, not every recession is average, right? So 2008, clearly lasted a lot longer. And the recovery period was much longer, the average recovery period after a recession is 18 months beyond that, before you start getting back into an expansion or growth cycle. And then the average peak to trough is actually five and a half years. So from, you know, recession to recession average is five and a half years. But if you look back in the last period, since the global financial crisis, the Great Recession in 2009, we had about a 12 to 13 year exit expansion period, so much longer than the averages. But the reason for that was extremely loose monetary policy, significant monetary supply into the system to encourage borrowing to encourage investment to encourage stimulating that economy. And that that stimulus, the volume of money supply into the system, as well as the extremely low interest rates allowed us to continue to move up, up up up up, the consequence of that is the the massive amount of debt. I mean, we have a quadrillion dollar debt derivative market. So if there’s any risk that I’m a little nervous about in the next year or two, especially if the Fed does continue to raise rates is more that we have a derivatives or a credit crisis, you know, related to this debt that we’re talking about. And if that happens, and it happens, not only in the US, but globally, our recession could last much longer than 10 months. Again, it could be a deeper recession, and it could take a lot longer than 18 months to recover from. But if we don’t have a crisis, and the Fed is able to kind of engineer this miraculous soft landing, if you will, or recession may not be as deep or as long this time. And so what I’ve learned is averages help us kind of have an idea of what to look for, what direction are we heading, are we heading in a positive expansionary direction or a negative contractionary era. But then we have to look at what are all the other kind of pins that can pop the external factors that could make something much more quickly go into recession be much deeper and be much longer. And it’s infinitely more complex today than it was in 2009 2009 was infinitely more complex than I ever realized. Until then, because I didn’t understand that the entire financial system was so intertwined with credit default swaps, essentially insurance on the value of of all the other companies they were investing in. And now we’re substantially more complicated than we were there with with global trade. Globalism over this last decade has really expanded the supply chain issues, potential escalation of war with Russia and Ukraine. So those things, the health of our global alliances over overseas, all of those things can impact our economy and the health of our currency, our interest rates and ultimately our asset values in a way that we’ve never had to really think about before. And so I think there’s more risk and more things that could tip us into deeper and faster recessions in the near future than what we’ve experienced in the recent past.

J Darrin Gross 34:56

Ya know, that that you know, Free Money has a price. And it’s not always recognizable at the front end. But, you know, in insurance, I mean, this is a, a, just the thing I’m dealing with with my clients. And that is just how reinsurance has been so affected by a lot of the global stuff and, and or the the, whatever global warming or whatever, however you want to phrase it, the insurance companies are a big believer in. But the, but what I’m seeing is like, they’re setting the price, which is increasing the price to the insurance companies, which increases the price to the retail buyers. But I’m seeing now that just yesterday, I had one where the buyer, we had had a claim a couple of years ago and had to raise, the price went way up. And last year, the deductible went way up. And this year, he took even a larger, you know, to x of a large deductible. So I went from my, you know, $25,000 deductible to a $50,000 deductible, and just his kind of ability to try and reconcile that. And I guess my question is, is, you know, when, when we go through this kind of adjustment phase is 1018 months, or however long it takes for buyers and sellers to recalibrate as to what is the market, you know, as prices keep going up. There’s not likely that prices are going to come back down. I mean, that’s kind of the hope. But I think that after a point, if everybody’s been paying the price, and that’s the cost of whatever it is you’re used to buying, it’s done all of a sudden, there’s not. There’s not like an endless supply and no demand, because the market is proved out there is demand and the price to support it. So, you know, I’m kind of curious, in your thoughts on that, as far as is that part of the trough? Is that? Or are we in kind of a new territory be based on the the increase the inflationary element? You know, because I think normally when we when we think about like the cycles, I don’t know how much inflation is built into the those cycles, whereas this inflation element, does it create a new element to to? You know, I guess, take stock in or to ponder? Sure.

Anna Kelley 37:26

Yeah, it’s interesting, because typically, when you’re nearing a top at the peak, there generally starts to be either a slowing of GDP, or an increase in inflation, that kind of tips you over from peak to heading down into the trough. We haven’t seen inflation like this, really, in my lifetime. I was born in 1974. And as you know, Volcker was you know, aggressively trying to kill inflation through most of the 1970s. And so this time, and again, the complexity of our economy is so much different than what it was 40 plus years ago, that it’s really hard to to say, what’s the norm and what’s going to happen, we really haven’t had this particular type of thing that’s pushing us over the edge. I mean, some of it was clearly pandemic spending, pandemic stimulus, pandemic supply chain issues. And so when you look at inflation, there’s really four key components that the Fed looks at, and the National Bureau of Economic Research that dates recessions, they look at core goods, in a core Energy for Food and core services, and poor energy and core food went up significantly when Russia invaded Ukraine, because they’re a major exporter of energy, of fertilizer, and quite a few crops as well. And so you know, that is a piece of the inflation that over time, we’ve seen start to come down a little bit. So food was very inflated, it’s coming down a little bit. Energy prices were, you know, really massively impacted by the war between Russia and Ukraine as well. And so when you have elevated energy costs and and or elevated oil costs, that means that transporting everything is more expensive. And so goods and food are gonna go up just by nature of energy going up. But then you add the COVID, supply chain issues, and there were back logs of goods and supplies for a very long time. And when there’s a lack of supply and a huge demand that creates this massive inflation. So the good news for us is all three of those have come down quite substantially. The piece that stickier that I’m a little bit concerned with is the core services and that is things you know, that we use as day to day services, it’s eating out its restaurants, it’s doctor’s visits, it’s all kinds of things. And so essentially, those core services have a lack of skilled workers and lack of workers for the number of jobs available, which is really caused wages to go up. So wage inflation is primarily related to core services. And so that’s why the Fed is trying to now really create enough pressure and make the costs of doing business, the cost of servicing debt, the cost of borrowing higher, so that companies have no choice but to start lowering wages, and reducing, you know, demand for jobs. So they’re trying to do that to bring inflation down. And if they bring inflation down successfully, without going into a deep recession, this next cycle may not be nearly as long or as bad. The thing that I worry about a little bit, and this is again, where we really don’t have precedents is that if the war escalates, you know, Russia’s invasion of Ukraine, the US and Germany are now sending in tanks and, you know, Russia saying, this is an act of aggression, et cetera, if this gets worse than energy prices, and food prices could come back up again. And regardless of what the Fed does, what they can really control is employment and wages and the amount of our debt, but they can’t really control prices of energy and food. And so we could have an escalation of inflation again, which could keep us you know, with the Fed having to continue to keep rates up to control what they can and be in a longer period of some type of recessionary decline. And then the last thing I’ll say is that a lot of this code, both COVID, and the war with Russia and Ukraine, is causing countries to really relook at how and where they distribute really items of national security, food, semiconductors, energy. And so I think there’s this D globalization and shift to let’s bring things back on shore, that is going to have a cost to it, that could keep inflation higher for much longer than what we anticipate. And so you could have an environment, this is what I actually think we’re going to have. That’s not really in a clear place in the cycle. It’s not really a deep recession, because there’s still some growth and there’s still inflation, it’s not really a peak, like inflation. In a healthy economy. It’s more akin to stagflation, where you have this declining growth, a stagnating growth, at the same time that you have elevated inflation. And if that happens, it’s really tough for us as investors to gauge where is it going to go and for how long? How long is it going to be, you know, negative, but I tend to think that we really can’t look at history and say, based on this, this recession is going to last this long, we’ll be out of it, this quickly, rates will go back to this cap rates will be you know, here or there, because there’s so many factors that are converging at the same time to make today’s market much more inflationary. And ultimately, the only way the Fed can do that can kill it is to create stress and deflation and decelerating growth or recession for a longer period of time.

J Darrin Gross 43:05

No, you clearly made the case for studying more than just the real estate market. I mean, there’s, there’s a lot to pay attention to a lot a lot of balls up in the air. And, you know, the hope is that they stay in the air, you know, and that there’s not a a somebody dropped the ball and, or crash kind of thing. And, and we keep this thing going. But

Anna Kelley 43:32

I think the thing, you know, the other key takeaway is that since we don’t know where these things are going, you really should be looking at your investments for more of a longer term strategy, you know, the days of value add, sell it in a year and a half or two years, because the economy’s booming, those days are over for now, you know, you’ve got to be really a resilient and very strong operator. Because if you can’t control the things that impact interest rates, which do impact cap rates and values, you’ve got to get really good at increasing noi on your assets. And you’ve got to have great debt that you know, you can basically know where your debt payments are going to be, and the reserves and the wherewithal to hold properties longer. So that if we don’t bounce back in two years, like we you know, have in the past, that you are very resilient and that you can hold these assets and wait several more years to have that kind of growth that we saw before to really boost asset values. So you know, there has to be a little bit of a shift from value add as the norm to more value add with the longer hold period, generate cash flow while you’re holding it and have have much more stable assets with stable debt until we can kind of see when we’re close to being on the other side of of this pain.

J Darrin Gross 44:53

No, no good. Good stuff there. Hey, Ana, if we could like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize, then we look to see if we could transfer. And that’s what an insurance policy is. And as such, I like to ask my guests if they can look at their own situation. Could be clients, investors, the economy and political? How are we you would frame your situation and and what you would consider to be the biggest risk? And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you Anna Kelley, what is the Biggest Risk?

Anna Kelley 46:00

I think the biggest Risk right now is not knowing how high inflation might get for how long and how that might impact both the interest rates over the next decade and cap rates over the next decade. And so with that risk comes a few things that we really have to look at. One, as we talked about is what kind of debt are you putting on your properties? So the question is, when you when you’re trying to create value for a commercial asset, you’re really focused on noi, and you’re focused on on the cap rate. And so these things that that we can’t control are these factors that impact interest rate and cap rate? And so we have to look at what can we control? What risks can we control? Since we can’t transfer that risk? It’s going to be what it is, what can we do to mitigate some of that risk, one of the things is investing in really strong, resilient markets, right? If you’re investing in a class C property and a Class C town with not a whole lot of good jobs, industry, diversity and not population growth, you know, more demand than there is supply, you’re going to really struggle. So if you want to mitigate risk, you need to be in areas that still need way more product than what there is demand for towns that have lots and lots of jobs so that if some businesses or industries get really hit hard, they’re still resilient, and there’s elevated wages and affordable, affordable living in those areas. So the market in which you invest is critical. And then the other thing is, you need to be able to control your expenses, what other expenses can you cut, or make sure that they’re fixed for some period of time, so that they’re not an additional variable that could impact your noi, and bring your value down as a nature of that? And so, you know, an insurance answer is basically, where do you invest? So I’ll give an example. I’m from Texas, and I’m from from Houston, and Houston has had a significant flood risk over the last couple of years because of hurricanes in certain areas of the city. Now, it’s a 10,000 square mile major metro. So Houston is extremely large. And there’s pockets that do not have flooding, and that are much less risky. Well, I want to buy assets there, because if I buy in an area that has had some flooding, I wouldn’t be surprised if my insurance goes up another 30 or 40%, like it has over the last couple of years. So you’ve got to get really good at where are my expenses? And where can I invest and what assets are going to give me the best outcomes, given all of the uncertainty to increase my noi to bank on where I can increase my noi by increasing income and cutting expenses. While I can’t mitigate, you know, the interest rates and the cap rates that we ultimately have.

J Darrin Gross 48:56

Yeah, now that that is very, very wise, of you to, you know, consider the flood zone of seeing the flood maps get redrawn multiple couple times here lately. And it’s usually a surprise to anybody that’s trying to refinance or are a

Anna Kelley 49:14

huge difference in asset values, especially in commercial real estate. So it doesn’t impact single family as much. But if you’re looking at something commercial, and your expenses go up, you know, 10%, it’s it’s hard to make that up, you know, unless again, you’re in an area where you can kind of name the rents or you can continue to increase rents to keep up with the increase in expenses. And that’s where location of your investments is extremely critical.

J Darrin Gross 49:38

Yeah, absolutely. Jana, where can listeners go if they’d like to learn more or connect with you?

Anna Kelley 49:45

Great, so you can find me on social media at Anna Kelly Rei Mom on Facebook, LinkedIn and Instagram. And if you are an accredited investor looking for multifamily opportunities in this market, where we also make a meaningful impact on the lives of our communities. You can find me on my website there at GreaterPurposeCapital.com.

J Darrin Gross 50:03

Awesome. Aana Kelly. I cannot say thanks enough for taking the time to talk today. I have enjoyed it immensely. I’ve learned a lot, and I look forward to doing it again soon.

Anna Kelley 50:16

Thank you so much for having me.

J Darrin Gross 50:18

Announcer 50:38

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How Real Estate Investors Can Leverage Virtual Assistants with Greg Brooks – CRE PN #405

Greg Brooks 0:00

Whether you need scale within your you know your accounting department your AP your AR your your your vendor management we handle a lot of work like that we do you know customer service work especially within our property managers right running their their maintenance lines, leasing inquiries, you know 24/7 Call coverage we do a lot within the customer service realm and then obviously the sales side as well and I think especially within our investment, real estate investor side of our business specifically commercial a lot of our clients leverage our virtual talent for for the sales side, someone who can kind of work that pipeline and help them raise a fund or have consistent communication with potential investors as well as the underwriting component of that.

Announcer 0:44

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you are an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:04

Today’s program is sponsored by Building Insurance and Risk. When you invest in real estate. It pays to work with a real estate investor protection specialists to protect yourself and your investment from catastrophic loss. The experts at building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Greg Brooks. Greg is a partner in Rocket Station and oversees everything, business development, and marketing. Greg is the National Director of Business Development at rocket station, an outsourcing company that helps real estate businesses hire experienced virtual assistants. And in just a minute, we’re going to speak with Greg about improving your process with virtual assistants.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe without a warm welcome my guest, Greg Brooks, welcome to CRE PN Radio.

Greg Brooks 2:58

Yeah, thanks so much for having us, Darrin, looking looking forward to the conversation.

J Darrin Gross 3:02

Likewise, before we get into it, if you could take just a minute and share with the listeners a little bit about your background.

Greg Brooks 3:10

Yeah, no, definitely. So we were very entrepreneurial entrepreneurial company. That’s kind of been my background, I was your kind of typical college graduate graduate with my MBA, and did the seven jobs in nine years trying to figure out what I wanted to do personally. So I’ve done everything from kind of I’ve owned, I’ve owned a couple of restaurants, I worked in the military resale channel, invested in real estate myself, and eventually landed here with my partners at at rocket station. So we’re the number one virtual staffing company to the real estate industry specifically. So we specialize in everything from commercial as well as residential property management, the brokerage side of the business all the way through to the investing side of it, and we’ve got just over 2200 team members overseas in the Philippines that work right alongside our our real estate clients every day.

J Darrin Gross 3:59

Awesome. Well, let’s let’s get into this. I’ve had some experience with virtual assistants, and I’m sure anybody listening to this has been touched or, you know, called or contacted or had some sort of a, an interaction that was created by or, or, you know, started by or somehow affected by a virtual assistant. What are some of the reasons why someone would would look to engage a virtual assistant?

Greg Brooks 4:37

Yeah, I mean, I think definitely the main reason a lot of people look initially into the virtual assistant space is the price point, right? You can kind of leverage the fact that you know, especially if you’re here in North America, you know, the dollar goes a lot further. And there’s very talented well educated skilled professionals all over the world that you know, you can have them work for you in this new digital working world that we all live in for a fraction of the cost of what it would, you know, potentially cost you to have them hire somebody, you know, in your local market or, or here stateside. So I think that’s the initial reason somebody’s looking for it, I think especially in the investing space, especially on the commercial space, right, you do have, you know, large enterprise level companies, which they’re looking to kind of subsidize their their workforces, and there’s always so much work to be done. And finding scalable, affordable talent is tough in any market, you know, across the US or Canada. Or if you’re, you know, the kind of side hustle investor, right, where maybe you’re doing your first syndication deal or raising your first round of funds. I mean, there’s so much that goes into that as well. And finding that really good virtual assistant that can really help you while maybe you’re working your nine to five job or while you’re trying to wear you know, the 50 different hats that you have to wear. I think a lot of people realize through through, especially through COVID, where we all kind of were virtual assistants in some capacity at one time or another that we do a lot of work a lot of commerce these days, especially in the real estate space, on our phone, on our computers, you know, on our different digital marketing channels. And you don’t necessarily have to be sitting in a traditional office to be able to do that. So, you know, through services like ours, we help our clients find real estate, specifically trained virtual talent that’s been evaluated, so that they can, you know, they can leverage it, whether they’re looking to hire at scale, you know, hundreds of team members, or they’re looking to make that first part time hire, you know, to help them raise their first fund for a syndication deal. We kind of help cater the talent, the skill sets of the VA to match where they are within their business journey.

J Darrin Gross 6:39

So what are some of the keys to having a successful experience with a VA,

Greg Brooks 6:47

For what we find and kind of how we’ve structured what we do, it all comes down to process, right, we’ve all been employees, I’m sure lots of us have hired people, what we find is the success between a successful hire or the difference between a successful hire and a not successful hire, sometimes it comes down to it being the wrong person, sometimes it’s not the right time or not the right fit, but what we find so often is it comes down to the clarity within the process within the role within the scope of work, you want that person to plug into, you know, especially just at the price point of VAS A lot of people think that VA is kind of a magic button, candidly, a lot of companies in this space, we’d been guilty of it kind of sell VA services as this, you know, the that was Easy button right from those old staples commercials. And it’s not, it’s a person, you need to give them clarity, you need to outline what you want them to do, you need to set realistic expectations. And as the business owner, you need to have at least a basic grasp on how to do it yourself so that you can train and onboard and hold this person accountable. So what we find is like the the implementation, the thoughtfulness within the process, within the clarity of what they’re going to do, is usually where you know, a lot of people struggle. And I think that’s true of hiring people in general, whether you’re hiring them into an office, or you’re hiring somebody, even maybe they’re virtual, but they’re in the same city as you, like it’s giving that clarity to the person so that they know what you want them to do how you want them to do it, that’s always the toughest part. Because for most entrepreneurs looking to hire, they don’t exactly have, you know, a lot of free time to sit there and plan and map and document, right, there’s usually a lot going on, that’s why you’re hiring in the first place.

J Darrin Gross 8:26

Yeah, I’m kind of chuckling inside because I think so many times the small business owner is somebody that was successful, somewhere else, and decided to go out on their own, and they know how to do it, but maybe not necessarily communicated to others. And so when they hire bring on people they don’t, the others don’t necessarily have the same level of success. And there’s this disconnect is I don’t know why that guy can’t, you know, that person can’t figure it out, it works, you know, this works great for me, kind of thing and that that communication, you know, the breaking it down as to what we do here and how we do it and why we do it is so key there. What are can you describe kind of a scope of of services or the skill set that you know, a va might be a good fit for?

Greg Brooks 9:21

Yeah, definitely. And I’ll give kind of two examples here. I mean, there’s talent all over the world, every corner that can do probably anything that you need done in your business, right, whether that’s you need graphic design, whether you need a great salesperson to go you know, reach out to potential investors and raise a new fund, whether you need someone with more technical abilities to you know, manage your data or maybe do some underwriting for you. When the term VA so often kind of gets discounted where people you say virtual assistant and they think of like, oh, you can, you know, order my groceries for me online and answer some emails and it’s like it kind of it kind of goes to the traditional like admin assistant, the The scope of virtual assistants that we deal with and we place with our clients, they truly are virtual professionals, our company, I mean, it’s very intentional. So if you’re watching on YouTube, it’s rocket station virtual staffing behind me because it’s, it’s an individual that has a specific skill set that truly is a professional and that when leverage correctly when screen correctly, when trained correctly, can do anything within your business that you need them to do what where we specifically play, we do a lot on the business operations, sales, marketing and accounting standpoint. So like whether you need scale within your you know, your accounting department and your AP, your AR, your your, your vendor management, we handle a lot of work like that. We do, you know, customer service work, especially within our property managers, right running their, their maintenance lines, leasing inquiries, you know, 24/7 call coverage, we do a lot within the customer service realm, and then obviously, the sales side, as well. And I think especially within our investment, real estate investor side of our business, specifically commercial a lot of our clients leverage our virtual talent for for the sales side, someone who can kind of work that pipeline and help them raise a fund or have consistent communication with potential investors, as well as the underwriting component of that.

J Darrin Gross 11:19

And do you find? Or is the herd the VAs you have? Are they traditionally, are they are they mostly doing inbound calls? Or is it somebody? Are they making outbound calls? Or is it more of like emails, you know, accounting, underwriting kind of things like you were describing?

Greg Brooks 11:40

Yeah, so we like say we cover all those bases. So we were very particular, we have a very rigorous onboarding for the VAs. And then we also have a very customizable experience that we give the client to really get a deep understanding, right, we talked about process, we like to really reiterate that we’re a process driven company, meaning we work with all of our clients to kind of flush out what is this role? Exactly? Is this inbound sales, outbound sales? Is this accounting? Is this a data management CRM specialist? Is this someone who you need help with the underwriting? Is it a marketing position, we help really take that deep dive with the client. And like you said, for that entrepreneur that used to be an employee, and is now doing it themselves and wearing 60 hats, a lot of them, it’s just, you know, you’re spinning in circles, you know, you’re, I gotta get this done, put this fire out, get over here. So we help them really, you know, slow down and understand, like, hey, if I could get five things off my plate, whether it’s because I run out of time to do it in my day, whether it’s because these are things that are pivotal to my business succeeding, or maybe it’s just things that I’m not good at, but I know needs to be done, we help our clients really unpack what those things are. And then custom match the talent based based around what the you know, the experience, you know, communication skills, salesmanship, like what that individual role is going to require for the for the eventual virtual assistant that

J Darrin Gross 12:54

they hire. And so tell me a little bit about kind of like a typical experience for somebody that’s that’s working with a VA. Does it start out like as a project as a start out kind of part time? Do they start out with a with a specific thing they’re trying to solve for?

Greg Brooks 13:18

Yeah, no, great question. So within within rocket station, we are fully dedicated, dedicated integrated virtual staffing. So that means our perfect client experience is we want your virtual assistant to look at and feel like they work for your company. So it’s strictly one on one there’s no like call center there’s no manager that relays what you need done to a to a group of people or one person, it’s all one on one our clients have a hand in interviewing and selecting the candidate they want from our pre screened pool. So we offer part time and full time we stay away from project based we find like a lot of the project based stuff we’re Our specialty is really helping our clients grow their businesses really create scalability really helped themselves remove themselves if they are a one or two person team remove themselves from a lot of the day to day and hire really talented individuals that can be a pivotal anchor within within their business. But but all all of those options exist. You know what we find is the difference between the people that are successful and not successful. It really does come down to that process piece of it right anytime you’re hiring but specifically when you’re outsourcing you know when your office is zoom when you’re communicating with a stranger that you can’t sit down in a room with and show them everything you know, whether it is a project based project whether you need some a team of people full time really being able to dive into that process and clearly scope out what you need done the expectations the KPIs around the role is really kind of what you know, what is the most important thing for anybody looking to hire virtually.

J Darrin Gross 14:48

So what are some limitations that you know having a VA present his or his or a list or anything you recognize right Up the top that a VA might present us this limitation.

Greg Brooks 15:04

So what I would say once again, speaking to kind of the entrepreneurial, you know, real estate investor, commercial real estate investor. I think so often, our clients see great results with their virtual teams, right? They maybe they hire them to just do some outbound sales or to do some underwriting work, some due diligence, some market research, and they start to try to hand off things too quickly, and try to have almost their virtual assistant run their business for them, you know what I mean? So I think what we try to get our clients to, and really the pathway we try to create for them is anything in your business that involves strategy, anything in your business that that involves final decision making, that should stay with you or should stay with local hires or executive suites, depending on how big your team is, where VAs can be right out of the gate, your first VA hire, you want it to be as impactful as possible, is really with like the day to day operational type work, right we and like I said, it kind of comes back to how VAs are kind of sold by some of the companies out there, it’s like it’s not a magic button, right? It’s somebody where there’s going to be a learning curve, they’re going to need communication, they’re going to need clarity in their role. So we find where entrepreneurs can really leverage VAs is, you know, on the operational type work. And keeping in mind, we have lots of clients that have had their VAs for four or five, six years. So those VAs roles have changed. We have clients who their VAs that were original hires with us are now managers within their teams. So there can always be that progression. But right out of the gate, you know, looking at that, we call them the $25. And under Tasks, right, the things that need to happen in the business. But you know that if you were to try to hire locally, you pay someone 25 bucks or less to do it. That’s the stuff where bas can come in and be very impactful. Right off the jump.

J Darrin Gross 16:56

No, that’s, that’s great. What about hours? You know, you mentioned the Philippines, I don’t know exactly what timezone that is, but I’m quite certain it’s not Central Time. Do they work your hours? Or do they? Or? Or is it a matter of what their task is to where they can? If they can do it on their time? Or were? How does that work?

Greg Brooks 17:24

Yeah, so we structure it to really mirror the in office experience. So to give you some background on the Philippines, and for the for the listeners that maybe aren’t that familiar, number one, the most beautiful beaches in the world highly recommend if anybody wants to do an overseas vacation, get to the Philippines. But they’re known as the nocturnal nation. So the virtual assistant experience that we’re talking about here, it’s called it’s part of a bigger industry called the business process outsourcing industry. So JP Morgan, American Express has 175,000 employees in Metro Manila, what we’re tapping into are the same resources that financial institutions that the fortune 1000 have leveraged, you know, for 2530 plus years, really, since the internet came online, it’s just now it’s more accessible, because the infrastructure over there is a lot stronger, because now we have platforms like zoom, and slack and CRMs that can be accessed through the cloud. So what how we structure most of our clients, the virtual, and a lot of the working economy in the Philippines have worked, you know, the business professionals, people with college degrees, people who manage teams, they work, you know, what’s known as the graveyard shift in the US, because they work mostly with Western clients, whether that be Europe, or, or North America. So it’s kind of a work in culture that’s flipped on their head. Part of our value prop is is we truly are kind of where we’ve truly are virtual meaning, if you think LA traffic is bad, or you’ve been through New York traffic traffic in Manila, you know, a country that’s a little bit smaller than the state of Florida, that has 160 million people in it. You know, you’re talking about working the overnight shift, and if traffic’s bad, you can be on the road for six to eight hours, roundtrip. So a big part of what we what we do is we you know, we put people into their home offices, you know, it allows them a lot more leverage their days flip, but they’re doing breakfast with the kids, getting them to school, you know, grab grabbing some sleep, doing the after school thing with kids and family, and then clocking in clocking in for work. You know, a lot of people you know, some people have questions about that for I’ll tell you just from working with, say, 1000 1000s of team members in the Philippines, it’s very normal for them. But but you do always have that flexibility depending on what you’re hiring. Like I said, we structure it because a lot of what we do is day to day operational stuff. But we do have some clients that you know, the virtual team members handle the overnight shift here in the US. So that’s a daytime shift in the Philippines. So we give that flexibility and I think for anybody out there hiring, if you’re interviewing if you’re putting job postings on Freelancer websites, make sure you are clear with with Setting, hey, this is going to be on a per project basis, I need to have very specific completion dates, or be just upfront saying, hey, I need you to cover 9am to 5pm, Central Standard Time, are you good with working? The overnight shift? It just one of those things you have to be aware of when you’re stepping into the virtual world? Because we’re not all on the, you know, the five time zones that touch the us

J Darrin Gross 20:22

know? So, this is a curiosity. I haven’t in my personal experience, asked her so are not not to this not like a sexist type of question, but I’m just kind of curious. Do you find it? Is there a is there a better performance as far as like, lead generation outbound calls? Male Voice versus a female voice? Is there any psychology there? Or Or have you found any any results that that, you know, say this or that?

Greg Brooks 21:05

No, I mean, it’s, it’s a great question. It’s something that we study very intensely. So our workforce is, it’s about 48%, male, 52% female, so we’re pretty much split right down the middle. I like to look at it on a on a per case basis, right, there’s a great, there’s great salespeople that are male, there’s great salespeople that are female, what I will say is where we see the patterns, in terms of the literally millions of hours of call data that we analyze, is specifically on the inbound and customer service side. You know, not to say a male can’t be successful in those roles. But we do find that when it comes to de escalations of calls, when it comes to NPS scoring around calls, female, you know, call agents do tend to score a tad bit higher on average than than their male counterparts. What I will say is, from the sales perspective, I’m just a big believer that that all does come down to the individual themselves, I think it doesn’t matter if you sit in Portland, OR Dallas, or Manila, or Mexico City, being a salesperson, and, and having a salesman ship about you is a very personalized skill. But as on the customer service side, we do see, you know, results a little bit favoring females, right, whether that’s on, you know, just from an experience standpoint, or whether that’s from the call, you know, what the caller wants to talk to kind of that more I don’t know, nourishing, I guess voice if you will, the customer service side, we do see a little bit more success with female female voices on the phone.

J Darrin Gross 22:34

And I, again, personal experience, I just know, I used to be a little while back and, and I remember, there were some candidates that I was having a conversation with, and, and again, it was maybe just the individuals the way they presented themselves, but I just remember, there was like a, you know, I was only listening to the call, but there was just a, in maybe it was just kind of an add on nurturing, or just like he was an add ease, kind of a thing as opposed to a somebody who’s trying to make a sale kind of thing as opposed to somebody who’s you know, engaging and, and we did really well with it, it was as an outbound lead generation kind of thing. And, you know, he worked out worked out really well. And I think the, the thing that I recognized is that when I engage in those lead generation activities myself, by the time that I actually get a viable prospect, I can be exhausted because I’ve been working through all these other activities trying to get to this one. Whereas when the, you know, the only one I’ve got to talk to is somebody who’s wanting to talk to me, it was like a whole different my energy was, you know, considerably different. I was excited to talk with them. And they were complimentary of the process and the person that set up the call and, and all that and it just it was it was literally it was just a kind of a great experience. And I’d love to have another project similar to what I was dealing with it that you know, was reasonable, we had one but I was I was impressed just in again the morning it was about offloading those, you know, that grind, if you will, you know, trying to do the outbound calls and and just have one teed up ready to go kind of thing was good.

Greg Brooks 24:26

Yeah. And that’s the type of stuff that VAs are incredible to be leveraged in within your business. You know what I mean? Like, just sales in general, right? The reason sales burns people out right, the average salesperson last last less than nine months at at a new job. I mean, it’s a grind, you got to keep the pipeline full. It’s a lot of nose, it’s a lot of phones put down and you as the business owner, who also has to number one, find time to make those calls and do that follow up and be consistent with it. But then you’ve also got to operate the rest of the business, right? It can just wear you down so that like those types of things to get that off of your plate if you don’t have enjoy I may not add in it, or it’s like, Hey, I just need someone that can consistently do this, because I can’t allocate 510 20 hours a week to it. I mean, those are the things that kind of the virtual assistant space is just really great at in terms of maximizing your time getting someone who is great at the cold calls and the outbound and can be consistent with it. So at the end of the day, you know, it all starts to kind of the ball starts to roll downhill for you, right, where now you’re starting to really see the results of that effort. And if that work,

J Darrin Gross 25:27

that’s great. You referenced $25 and under, is there a, like a cost comparison, or like a sense of what it might cost? If he were to compare, you know, domestic labor to the VA? The same task? Kind of thing? Is there a way in your, your approach to prospective clients? Is there some sort of a range or a number that you would expect it to be compared to a domestic employee? Or is it market specific? Or?

Greg Brooks 26:02

Yeah, so So to the US, the just the cost of living, and this just this goes in general to the Philippines is about 1/5, to one, six, the average. So for example, you know, a typical, you know, a $15 an hour employee that you’d hire here locally, right, that’s a four or $5 an hour employee in the Philippines, and not just in terms of compensation, that’s also kind of the the living, you know, the kind of, you know, lower middle class, middle class, upper middle class breakdown, that that’s just consistent with the with the value and cost of living in the Philippines. Right. So that’s, that’s one of the most probably rewarding things there. And that I see every single day within within our workforces, and our teams, is our pricing is it’s $10 an hour for a full time, you know, 40 hour a week virtual assistant. And I mean, from that, you know, there’s there’s a little bit of management fee that’s built in there, but from what the VA is making, you know, they’re living upper middle class lives are putting away for their kids, they’re building their first houses buying their first property, kind of everything, right that the American dream and the real estate industry has built around. Like, we’re able to provide that to our, to our virtual assistants, and we look at it as a as a triple win, right, we’re able to continue to grow rocket stations presence recruit more better individuals to service our clients, the client wins, because they have someone that for minimum wage, is doing the caliber of work of a 5060 $70,000 a year type employee. And then obviously, the VA wins right there, they’re able to provide for their family and have a stable income. And, you know, typically, with our client relationship where most of our clients have, you know, anywhere from seven to 10 Vas, they’re working in small teams, right, they’re actually talking to their boss, they’re not at American Express where, you know, their number, you know, 12,406 of 175,000, right, they’re actually working in a business and they’re having impact. And you see that passion come out in it. So like seeing those triple wins are, are really kind of what you know, I mean, that’s what gets me up every morning, and it has really allowed our company to kind of grow and flourish over the last few years.

J Darrin Gross 28:05

Now, that’s cool, the kind of more of the long term sense of things. And, you know, it’s funny, I know, obviously, Verizon, cell phone service, remember making a call, and it was very clear that there was a VA and, and great service and stuff, but I was like, you know, here’s, you know, like you said fortune 500 companies that are that are using this and and, you know, great, great skill said great customer service. And, and, you know, it’s it’s everywhere. I mean, it’s it’s again, it’s a it’s a matter of trying to contain your cost, and get the level of service that you’re trying to deliver to your clients. Makes complete sense.

Greg Brooks 28:51

Yeah. And I think just from a culture standpoint, within a company, we, I think everybody experiences this, whether you’re a solopreneur, or you work, you have an enterprise level company with 1000s of people, there’s always more to be done. Right? There’s just always more well, how can I how can I create a great customer experience? How can I create a great client experience a great investor experience, right? It takes time. So finding a way to balance like, Hey, we’re all running businesses that we want to make money in with, like paying enough people or having enough people to handle all of the work being done like that. I mean, that’s business. Right? That’s, that’s the toughest part. But what we really see from the feedback from a lot of our clients is like said, whether you are that one man or woman show or whether you’re, you know, managing the large teams is we’re able to get high level people out of doing C and D level work, like you talked about, you had great passion with actually talking to somebody that was interested in doing a deal, right, but it was the grind of doing the cold calls and trying to find that person that was wearing you out. Well, that’s the C and D level work so we can bring you someone in who’s technically more talented, who is very affordable for your business who can handle that work. So now you can focus or your teams can Focus on the A and B level work that you actually want them to do, right? The stuff that’s actually going to help the business grow or help you take on a new market or help you bring on another investment property. So that’s that’s kind of like the full cycle, what we love to see is like the virtual assistant space, the BPO space, when done correctly, it lets you invest your resources appropriately, where you can kind of have all of it right, you can have the great experience, you can have a workplace with a great culture, and you can have people slotted doing the work that you really want them to do, you know, not stuck behind a computer trying to get through their emails or catch up on calls or, you know, slog through a bunch of cold calls, right, we can actually get great people in the right seats so that everybody can level up over time.

J Darrin Gross 30:41

Now, I’m believer in it and have seen it work well. So I agree. Hey, Greg, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And when that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if we can transfer it. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be their clients, political, you know, interest rates, the market, whatever you identify, or you consider to be the biggest risk. It’s free for you to define. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Greg Brooks, what is the Biggest Risk?

Greg Brooks 32:01

For me, I think it’s the pace of how quickly technology is changing how quickly global workforces is changing. And I think it’s a risk, especially in the real estate space, for those that are still trying to operate the same way they were in 1995, or two, even 2005, or even 2015. What we’ve seen a lot both on the technology side, obviously, US servicing on the staffing side, providing a virtual option. I mean, just like everything, the decisions that you have to make as a business operator are just accelerating, you have to make them faster, there’s a new software and new technology, a new tool, a new resource out there every second every trade show every corner. So having an effective way to vet those to find the ones that are going to work for your business and are going to fit, but then also getting people on boarded into them and changing existing policies and procedures and processes and weigh the ways that you operate to be more efficient, it takes a ton of human capital. So that’s something that I see I know, even just within our company, you know, in a short time becoming as big as we are, you know, that that that the evolution of technology and say a lot of the podcasts that I listened to AI is kind of the word of the here already, you know, 25 days into January. And I think that puts a lot. I mean, it puts a lot of risk on the owners in terms of making the right choices, finding the things that are going to last and actually take you to the next level and which of the things are kind of fly by night, you know, not not as good as as advertised. So I see ICT technology and then that globally expanding workforce, you know, really becoming something that especially in the real estate world, people need to be aware of and be talking about consistently, in order to make sure that you don’t get left behind because I guarantee your competitors. They’re making sure they’re not going to be left behind either.

J Darrin Gross 34:04

Oh boy, do I know that I’m talking to Mr. Slow ski. This as far as the adopter of these things, but you know, it’s it’s definitely a changing world. fast pace. That’s good. Hey, Greg, where can listeners go? If they would like to learn more connect with you?

Greg Brooks 34:23

Yeah, definitely. I encourage anybody to check, check out our website RocketStation.com If anybody say is looking for a VA wants to talk processes, best practices, looking to hire. So I’ve made my calendar available at Discovery.RocketStation.com We’d love to have a quick little 30 minute chat. See where you’re at see if it’s the right time to hire a virtual assistant. kind of understand what your needs are. So yeah, rocket station.com or book a call with us at Discovery dot rocket station dot com.

J Darrin Gross 34:55

Well alright. Well Greg Brooks, I can’t say thanks enough for taking the time to Talk today. I’ve enjoyed it. I learned a lot, and I look forward to doing it again soon.

Greg Brooks 35:06

Thanks so much Darrin, you have a good one. All right.

J Darrin Gross 35:09

For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this tweak till next time. Thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

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